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Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 DCP Midstream Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this call maybe recorded.
It is now my pleasure to introduce VP, Investor Relations, Ms. Irene Lofland. Please go ahead.
Thank you, Andrew. Good morning and welcome everyone to the DCP Midstream's third quarter 2018 earnings call. Today's call is being webcast and the supporting slides can be accessed under the Investor section of our website at dcpmidstream.com.
Before we begin, I'd like to point out that our discussion today includes forward-looking statements. Actual results may differ due to certain Risk Factors that affect our business. Please review the second slide in the deck that describes our use of forward-looking statements, and for a complete listing of the Risk Factors, please refer to the partnership's latest SEC filings.
We will also use various non-GAAP measures, which are reconciled to the nearest GAAP measures and schedules in the Appendix section of the slide.
Wouter van Kempen, CEO; and Sean O'Brien, CFO, will be our speakers today. And after their remarks, we will be happy to take your questions.
With that, I'll turn the call over to Wouter.
Thank you, Irene, good morning everyone. Appreciate you joining us.
On today's call, we will discuss the strong third quarter results, outline the progress on our outstanding growth projects, address the political environment in Colorado, provide a brief outlook for 2019, and highlight the competitive advantage over the first five business model and our transformational journey.
Beginning with our financial results, we had a tremendous quarter, resulting in adjusted EBITDA of $309 million and $209 million of distributable cash flow totaling $546 million of DCF year-to-date. We delivered a distribution coverage ratio of 1.355 for the third quarter while maintaining the slowest leverage ratio of 3.6 times as of September 30th.
As an outcome of our dedicated focus of optimizing a fully integrated portfolio and as demonstrated by these outstanding results, we expect to exceed our guidance for both 2018 adjusted EBITDA and DCF. Our strong earnings underpinned by increasing volumes across our entire footprint, as we saw an approximately 35% increase in NGLs throughput volumes year-over-year, and a roughly 10% increase in our gathering and processing points.
To capitalize on the third production resurgence, DCP is executing a focused multi-year multi-basin multi-segment growth strategy that is mindful of the systemic overbuild our industry has created in past cycles. We will cover these projects in detail later in the call but as you can see we are expanding our NGL takeaway capacity, supply, and market connectivity on both Sand Hills and Southern Hills as we work through planned expansions and innovative optimization strategies stemming from DCP 2.0.
We're also building out substantial capacity within our G&P segment as we successfully operate Mewbourn 3 plan, quickly progress on the construction of O'Connor 2, and prudently advance our Bighorn facility in Colorado.
Ultimately, we delivered very strong third quarter results, while successfully executing a long-term capital allocation strategy to ensure we continue to achieve a vision of DCP 2020.
On the next slide, I cannot overstate just how significantly our company has transformed over the past number of years. We have strategically expanded and integrated our diversified asset portfolio to drive strong earnings and show long-term stability in any environment and meet our customers' needs across the full value chain of Midstream services.
Additionally, we maintain a leading position in the industry's overall technological revolution. We have embarked on a remarkable digital transformation by DCP 2.0 that continues to drive margins, optimizing operations, and is further elevating our company's long-term competitive advantage.
As illustrated by these two maps, the DCP of 2010 is far cry from the powerhouse company our employees have built over the last eight years.
And moving to Slide 6, I want to update you on our continued success in the strategic execution of our growth projects with a focus on capital discipline and strong returns. We continue to realize the vision of leveraging our comprehensive value chain to meet the needs of our customers while maximizing returns and unitholder value. Looking at the logistics and marketing side of the house, we're experiencing record throughput in some of our largest pipelines including Sand Hills, Southern Hills, and Front Range.
At the end of the third quarter, Sand Hills reached record throughput at a 99% utilization rate driving strong margins in our logistics segment. Sand Hills also underwent an incremental capacity expansion to 440,000 barrels per day by the end of the third quarter and is expected to reach 485,000 barrels per day within the next two months, providing a clear line of sight to continue future margin growth, and thanks to our innovative DCP 2.0 efforts. By the end of the third quarter, our team replicated the success of the Sand Hills optimization by increasing Southern Hills capacity from 175,000 barrels per day to over 190,000 barrels per day.
Like the Sand Hills effort, this 15,000 plus barrel per day capacity growth required very little capital to produce very significant future cash flows.
Looking to the second half of next year, the future expansion of Southern Hills into the DJ Basin via White Cliffs will have 90,000 per day of NGL takeaway for our Colorado customers.
The additional growth projects announced on previous calls including Gulf Coast Express, the Sweeny Fractionators, expansion of the Front Range in Texas Express pipeline, and a Cheyenne Connector are all progressing well and are within their established timelines.
Looking at our growth within the G&P segment, Mewbourn 3, which was brought online ahead of all announced and accelerated timelines on August 1st of this year was safety built and put in service within just nine months of breaking ground. Additionally, Mewbourn 3 has had an extremely successfully on efficient commissioning and volume ramp-up period to quickly meet the needs of our customers. The plant was processing 100 million cubic feet per day within a week and reached its full 200 million cubic feet per day capacity about a month after its in-service date. Line pressures in the basins have notably decreased and we're now processing approximately 1 billion cubic feet of gas per day in Colorado.
Also we're currently progressing well on the construction of O'Connor 2 our upcoming 300 million cubic feet per day facility. And as we look to a 12th plant in the basin, the Bighorn facility, we're prudently awaiting an FID pending the results of today's election which brings me to the next slide.
As you all know Proposition 112 in Colorado is a top priority issue for many including DCP and on Slide 7 we have provided a simplified summary of our scenario planning. Through increased setbacks, Proposition 112 would effectively prohibit future energy production on a substantial amount of state and private lands. We stand by the integrity and safety of our operations and have been proud to join Colorado's industry and our state's top leaders from every political background in a remarkable effort to defeat this draconian ballot measure. We're optimistic that Coloradans will defeat Proposition 112.
So let’s look at the potential outcomes of today's vote. Should Proposition 112 fail DCP maintains a strong outlook in the DJ Basin underpinned by strong customer relationships and a deep bench of tremendous growth projects like O'Connor 2 and Bighorn as well as multiple residual gas and NGL pipeline expansions. I firmly believe that some of the best natural resources in this country are under our feet here in Colorado and DJ Basin has an incredibly bright future.
But I want to be clear we will not breathe sigh of relief and assume business as usual should the voter's deceit this composition. We are committed to working with all policy makers, regulators, communities and our stakeholders to develop a sustainable solution that allows for responsible energy development, while ensuring neighbors are confident in our safety and environmental processes.
On the other hand, as a company, we can successfully manage through the passage of Proposition 112, a strategy to evolve from a company almost exclusively focused on G&P to a well diversified full service Mid-Stream provider across a wide geographic footprint has served us well in many ways and today's vote is no exception.
It is important to note that while DJ Basin is a very successful component of our G&P portfolio, the vast majority of our business will remain unaffected by the potential impacts of Proposition 112. Additionally should it pass, we anticipate a system into DJ Basin would continue to be at full capacity for multiple years ahead due to the existing inventory of permitted and drilled and uncompleted wells.
Lastly, as part of our comprehensive strategy, should Proposition 112 pass, we will reevaluate and likely defer the investment decision for the Bighorn facility and refocus on our portfolio of growth opportunities in other basins.
In either case two things are apparent. First, we are well diversified and exceptionally positioned to successfully operate a portfolio of assets in a country's top tier basins for days to come. No matter the outcome of this election.
Second, industry's outreach have demonstrated astounding courage, passion, and commitment to responsible energy development in Colorado. And I want to sincerely thank our employees, those of our peers and many, many other industries for their dedication and effort during this election season.
With that, I'll turn it over to Sean to take you through our financial results.
Thanks, Wouter, and good morning.
Today I'm very excited to talk through our exceptional third quarter results and the significant progress we're making on our financial goals. Slide 8 highlights our strong execution delivering Q3 DCF of $209 million and adjusted EBITDA of $309 million. In Q3 our broad asset base was hitting on all cylinders, with excellent performance across both of our business segments and throughout all of our geographic regions.
Shifting to our business segment, we had a mammoth quarter for our logistics and marketing business which resulted in a $47 million margin increase over last year. Our NGL volume growth drove record pipeline capacity utilization and earnings across our asset base.
On the G&P side Mewbourn 3's accelerated completion and expedited volume ramp drove increased cash flows. The Mid-Continent an Eagle Ford continued this year's trend of higher volumes as a result of our commitment to improve reliability and efficiencies delivering increased margin growth over last year.
Strong G&P margins across our footprint more than offset the expected lowered cash flows from our discovery JV.
Q3 solid performance is a great example of how we're delivering on our commitment to meet our customers needs as quickly as possible as we bring substantial projects on line ahead of the expected timelines including the Sand Hills expansion and the Mewbourn 3 facility.
As I guided earlier in the year, costs were higher in Q3 as we bring on new assets ahead of budgeted schedules, continue to advance our DCP 2.0 transformation, and step up our targeted efforts focused on improving reliability across our footprint. It's important to note that a portion of our costs are driving immediate increased margins and cash flows evidenced by our strong results throughout this year. We expect this cost trend continue into 2019 as we continue to invest and drive margins.
Overall price was favorable driven by higher crude and NGL pricing partially offset by lower gas pricing. As you know NYMEX gas prices are down slightly year-over-year however due to wining basis differentials in many of the regions where we sell our gas, our realized gas prices were down more than NYMEX compared to the prior year.
Similarly the Mont Belvieu based industry barrel is up significantly and while we sell the majority of our NGLs upon Belvieu and benefited from this increase, a portion of our NGLs are sold at Conway where pricing has been relatively flat.
Looking forward to Q4, we're expecting DCF to be lower than Q3, as we anticipate some timing differences to materialize via higher maintenance capital, lower distributions from our JVs, as well as increased ethane rejection, and continued wide basis differentials for gas and the Conway NGL prices.
Additionally in Q4 we expect to see continued strong DJ results supported by a full quarter of Mewbourn 3 and increased pipeline volumes across our logistics segment.
We've also updated our 2018 growth capital guidance from $750 million to $825 million to $900 million, primarily due to timing of our capital spend, including the acceleration of our O'Connor 2 facility and multiple downstream projects focused on addressing infrastructure concerns for our customers.
And finally, as Wouter mentioned earlier, driven by our strong results year-to-date, we anticipate that we will exceed the high-end of our 2018 adjusted EBITDA and DCF guidance ranges.
Now moving to Slide 9, I'll highlight the substantial progress we've made on our financial position as we continue to produce strong results, pre-fund the portion of our growth, and improve our balance sheet. Our third quarter financial metrics were significantly ahead of all of our targets with the bank leverage ratio of 3.6 times and an exceptional distribution coverage of 1.35 times, demonstrating our consistent ability to deliver on our financial priorities.
We continue to maintain ample liquidity with over $1.2 billion available on our bank facility coupled with the addition of our $200 million accounts receivable securitization program. Additionally, we continue to proactively manage our growth program as evidenced by our recent $110 million retail preferred equity raise. We're strengthening our coverage ratio delivering 1.3 times in Q3 which is helping us partially self fund a portion of our growth projects.
All in all, we continue to enhance our financial position and deliver metrics stronger than the goals we established at the beginning of this year.
And with that, I'll turn it over to Wouter to give a brief outlook on 2019.
Thanks, Sean.
Looking ahead to 2019, so we have dedicated focus and operational excellence in executing the strong capital allocation strategy, we expect to generate increased cash flows across our portfolio. The industry is roaring back from the downturn and demand for new infrastructure across the country is rapidly increasing, while existing systems have reached record utilization.
DCP is well-positioned to thrive long-term in this dynamic environment with a world-class lineup of growth projects that we're already executing to meet the needs of our customers and increase margins year-over-year.
In 2019, on top of a full-year of cash flows from Mewbourn 3 and the additional expansion of Sand Hills, we will be bringing five substantial projects online from O'Connor 2 in the Gathering & Processing side to multiple projects within our NGL and gas takeaway portfolio.
In the short-term as timelines vary on growth projects within different segments of the industries value chain, temporary constraints have and really emerge. The industries current constraints and pipeline and fractionation capacity has led to widening base of differentials, increased ethane rejection, and unusually high fractionation fees.
For DCP specifically, we'll plan to get full 2019 guidance on our next call in February but I want to give a little color in advance. Though we anticipate the current constraints could dampen short-term volume and margin growth, we continue to see long-term upside as we expect high capacity utilization for current and upcoming logistics projects.
Altogether, we look forward to a very solid 2019 for DCP as we bring a tremendous amount of growth online, utilize our fully integrated and balanced portfolio to strategically navigate a dynamic industry environment and continue to invest in our culture of operational excellence.
In closing, on Slide 11, our team delivered outstanding third quarter results while successfully executing a long-term capital allocation strategy focused in disciplined growth and increased cash flows. As an outcome of our dedicated focus on optimizing our portfolio, we exceeded our distribution coverage target and expect to exceed the high-end of our EBITDA and DCF guided ranges for the full-year.
A proactive approach to diversifying and balancing our asset base continues to not only produce strong financial results and better customer service, but it's mitigated risk in challenging pricing, infrastructure, and political environments.
Ultimately, throughout our tremendous footprint, our commitment to safety, operational excellence, and long-term sustainable growth will continue to drive strong customer relationships and outstanding unitholder value.
Thank you. We're happy to take your questions now. Andrew, please open the lines.
Certainly. [Operator Instructions].
Our first question comes from the line of Spiro Dounis with Credit Suisse. Your line is now open.
Hey, good morning everyone. I just wanted to start off maybe on the decision delay of IDE on Bighorn seems to make a lot of sense obviously Colorado's going to be impactful here but I think we've heard from a lot of your peers last week and maybe didn't sound like their guidance or outlook at least for 2019 was really going to change much and so there seems to be a bit of a disparity there and so I was curious seems like you guys are making this decision may be conservative but just curious why you think your peers are making the same decisions?
Well, I cannot really talk about what our peers are exactly talking about or what the customers are talking about I'm not going to specifically address those. But O'Connor 2 is coming online, so if you're thinking about what is happening in 2019 and what the plans for people are in 2019, obviously our acceleration and expansion of the O'Connor 2 plant coming online in the second quarter of 2019 is going to absolutely help significantly with processing needs in the DJ Basin. So overall when you look at that, I think that is a very good outcome and the right thing to do.
As it pertains to what we're doing with Bighorn, I don't think you would want us to FID a plant of this size and of this magnitude and then in lights of what we're seeing potentially happening here in Colorado. I mentioned on the call, I'm very confident in the fact that Proposition 112 will not pass. And again we dedicated a pretty significant portion of this goal in my prepared remarks giving you scenario planning around what is happening if it's -- if 112 passes or if 112 fails, and I really think from that point of view we probably have provided all of information that we can give to you at this very stage, it's an interesting day, it's an exciting day, Election Day is always an exciting day, I said earlier I'm very confident that 112 will be defeated by Coloradans at the ballot box, but obviously we're going to be excited to start watching the news at 7 o'clock tonight when the polls close.
Yes, that's certainly draw, pretty excited about having this get past this year. You mentioned accelerating O'Connor 2 at least on the spending side, but I think the timeline at least from last quarter is still about the same for 2Q 2019, just curious if you have an ability to really to beat that timeline seems like your peers you just mentioned are pretty eager to see that bottleneck removed, you beat deadlines in the past, you think there's some upside there?
We accelerated fairly significantly on the last goal rather than like these are large facilities, these are -- this is large very complex facility it takes hundreds and hundreds and hundreds of people working throughout a long-time period to get these plants online. We brought Mewbourn online probably within nine months or so which was very, very quick probably one of the fastest processing plants that has been built in this country. We're obviously trying to replicate that with O'Connor 2 again but the Q2 is really taking in consideration that we would replicate that that time period.
I think Spiro the other thing that people got to think through this is a much broader issue, people focus on processing capacity, but I can tell you if the DJ Basin would have a Bcf of processing capacity sitting idle today and would been brought online tomorrow in some way, shape, or form, I don't think that overall production out of the basin would grow very substantially.
Let's go through the different things that we're dealing with and this is all about what we're seeing in the industry as a whole, not only in the DJ Basin, we're seeing it in Permian, in the Mid-Continent everywhere in this country we're seeing five bottlenecks because the countries four.
Look at the DJ Basin specifically, we are continuing to wait on an expansion of CIG’s residue gas outlet that one has been delayed a couple of times. So gas outlets on residue gas outlets are very, very tight in the DJ Basin. We are addressing that with our Cheyenne Connector project that is coming online to make sure we bring an extra $600 million to-date of gas residue takeaway out of the basin.
If you look at NGL pipelines, Front Range is very, very full. That's why we're expanding Front Range and Texas Express and why we're also doing additional NGL outlet into the basin via expanding Southern Hills via White Cliffs. So that's the second piece that we’re taking care of.
But even if all of those would be in place today, we all know that fractionation capacity is tremendously tight at the U.S. Gulf Coast. So even if there would be plenty of processing capacity, gas takeaway capacity, NGL takeaway capacity, crude takeaway capacity, you're still dealing with the fact that fractionation capacity is also tremendously tied in the country. We're addressing that together with Phillips 66 we're very excited to partner with Phillips 66 in their project to build new fractionation at the U.S. Gulf Coast but all of those pieces need to work for this industry to work as a whole.
This is not just about processing and it is about if you think about as a whole, producers have been able to ramp-up very, very quickly past our 15, 16 downturn as midstreamers and an industry as a whole, we've been trying to keep pace but all of our timelines are very, very different than a producer timeline, the great thing about the shale revolution is that producers can flex their production capacity very, very quickly, they can ramp it up very quickly but building long-haul pipelines, fractionators, gas processing plants takes much, much more time and we're seeing that right now where we have a period of time where midstream capacity for an industry as a whole is pretty tight and producers can move quicker.
There's a good thing to this as well. When you're in a place like this, it means you have very high utilization on your assets and that's what you're seeing in our numbers today, there's a reason why our marketing and logistics business is doing so great. Why you're seeing growth in the Gathering & Processing side of the house, why we're beating overall DCF numbers to the Street by close to 25% because the assets are running really well and they're pretty full. So there have always been -- there is always a bright side to the problem.
Thank you. And our next question comes from the line of Shneur Gershuni with UBS. Your line is now open.
Just a quick question on the Colorado aspect here or the DJ aspect and I realize you've covered a lot in the slides and the color that you've given, just one extra data point I was wondering if you could share, what is your thought of the decline rate in the basin if there's no further drilling activity let's say three years down the line once all the permits have been exhausted?
So I'm not going to speculate on that Shneur, like there is way, way, way too much wood to be chopped between here and then to go through that. I said I'm very comfortable with everything that's been permitted, that everything that is drilled and uncompleted, most importantly I'm very confident that we will defeat this at the ballot box. So I think it's way too early to start speculating what would happen in three years if -- I think it's too early for us to know.
Okay. Fair enough and don’t blame me for trying to ask a question.
I can't blame you.
Just a couple of quick follow-ups, with the coverage that you just posted that in excess of 1.3 times, does this reopen the discussion about converting the IDRs to units is kind of a face simplification?
Well let me take that. I think obviously this was a really, really good quarter and at the same time, Sean also guided two way, what do we see in the fourth quarter, so we're not looking at a fourth quarter that has the same type of coverage. But all in all unlikely this is absolutely going the right direction which is a great thing. But we have been working on for years, is having a capital allocation strategy that is smart where we don't go over our skiis, where we don't overbuild where equity needs are very manageable, we haven't been in the equity markets for multiple years, I think early 2015 was the last time we were in the common equity markets.
Sean and team have done a remarkable job of prefunding when there is opportunities to go into the market, graph kind of do some debt, do some preferred deals make sure that more head of our funding needs versus the growth that we're seeing.
We're bringing growth online just in time as needed filling it up really quickly which obviously helps everything it helps coverage, it helps our results, it's also interesting this quarter it helps from a balance sheet point of view and our metrics that are really pointing into the right direction. All of that what it gives us is great optionality but it also gives us is it option to sell fund, and we have great growth projects that are coming online as we continue to be able to bring online to address all these industry needs that we all are talking about and seeing every single day, self funding some of those growth projects I think is tremendously important because in the long run that really, really helps the unit holder.
In the end we have multiple jobs, our job is to make sure in the long run we managed this company the right way for the unitholders for the shareholders, for all of our stakeholders that also means returning capital to the unit holders, that means over time maybe have an opportunity to raise your distributions. It also has an opportunity to address IDRs and give you more flexibility around IDRs, my comments around IDRs are the same as I named in public many times before it's really not a matter of are you going to do this but manage the right time to do it and obviously having stronger coverage gives you more flexibility, so will continue to look at it and we'll do this when it's the right time for us.
Okay, thank you for the color there, just one final question. I was looking when your slides, you talk about your heads position you know for 2018 and 2019 and so forth and obviously you've got plenty of upside from an NGL perspective for 2019, but when I think about all the capital that you're currently spending you’re shortly in the slide mentions that you've got 60% of your 2018 gross margins are being fee-based. Once all the capitals deployed, how does the business can look at that point, are we going to be in a position where 70% is fee base or is it going to be even higher? I just want to think of a simpler what the company looks like when you're done.
I think that to near the progress to get to the 60% has been huge right in the last eight or nine years it's the company at one point if you go back was closer to 10% to 20%, so kudos to the company we really changed it around adding the full value chain.
In terms of where it's going to go over the next few years obviously will give guidance on our next call around what 2019 looks like but clearly if you look at where we're spending money, where we're at the point money where we're seeing really strong margin growth evidence by Q3 the NGL in the logistics side the equation is growing quite a bit, so I can tell you directionally I would expect that to grow.
It doesn't get to 70% directionally I think we're going to move it, it's getting harder to move because the company's becoming larger and obviously early on it was easier to move, but we're definitely moving in the right side, in the right direction and we'll continue to see that 60% growth as we move forward.
Perfect. Thank you very much guys. Really appreciate the color.
Thanks.
Thank you and our next question comes from the line of Elvira Scotto with RBC Capital Markets. Your line is now open.
Hey, good morning, everyone. Can you provide a little more detail on that increase in growth CapEx guidance in 2018, how much of that is an acceleration of O’Conner 2 spend versus incremental CapEx?
Most of it, Elvira, is acceleration kind of my in my written comments, I mentioned O’Conner 2 is that is one of the larger items. There's a multiple, there's many things Wouter talked a lot about this constrained environment, so our goal is to get as much infrastructure up and running as fast as we can. So I O’Conner 2 is one great example of that but we're trying to accelerate some of these NGL so high, White Cliffs those types of things, the Sand Hills expansion as we go through the rest of this year. And those types of things as well as some of the some of the stuff that we're doing just tied to the Permian Basin as well where the scoop stack so cross our base asset base, so I think all of that is really an acceleration not a lot of incremental.
We've got to deal with the incremental before one when we gave guidance to the high end we reference White Cliffs and some of the new projects, what you're seeing now is just us moving expenses we can to help deal with the constrained environment.
Got it. So then can you talk a little bit more about some of these constraints that you mentioned that may dampen short term growth; is that mostly on tight fractionation capacity causing more ethane rejection, and just can you just elaborate a little more on that?
Yes, Elvira, it’s Wouter. And you’re absolutely right, it’s around five fractionation capacity where it’s predominantly. So maybe Okana or not maybe you will be in a place where as an industry you’re rejecting much more ethane in this current environment than you would do normally. If you look at where frac spreads are in this current environment, you would try to extract all the ethane that you can because it’s absolutely economically the right thing to do but you’re seeing as a whole the industry rejecting more and more, you see that in our numbers as well. So that is one thing that you see a direct impact, and the indirect impact of that can be that potentially have little less volumes on some of your pipeline, so if you have full ethane recovery.
I think for us as a whole, we are very confident around 2019, we’re confident that we will show very nice growth but you are in a constrained environment. So we'll probably have a little less growth than you would see in a completely fully unconstrained environment and some of that is probably going to push into 2020.
I don’t think that per se a bad thing, might continue to see very, very high utilization rates, I think the most important thing in this environment for us is that we are very confident that we will keep our customers products flowing. We have a very large balance frac capacity that we own about 155,000 barrels a day, we are one of the largest buyers of frac capacity, we have a lot of levers to manage through this environment and we were in a constrained environment before where we during Harvey if you go back a year from today, we were sitting on our earnings call discussing Hurricane Harvey which was a very constrained NGL environment and our marketing and commercial people were able to keep things moving very, very nicely.
So we also via our system that we have with Sand and Southern Hills that Open Access pipelines, we can reach every frac out there, we have access to every Mont Belvieu frac, every Conway frac, Buston, Sweeney and obviously we’re excited about what we’re doing with Philips 66 and we’re taking in that project when additional fractionation space comes online.
Yes, I think the other thing around as we look at Q4 in 2019, I think you were alluding to it, these constraints are driving obviously some basis prices to be down considerably, I referenced some of the gas areas where we sell our gas is well below the NYMEX and then I referenced more specifically Conway, Belvieu NGLs are has been relatively strong, but because of the constraints you’re seeing in Conway there. So these are reasons why as I guided to Q4 and as we talk about next year I just want to make sure people are not taking Q3 adding all the new growth and just timesing it by four as they look at 2019. To Wouter’s point we feel really good about 2019 but obviously the environment is getting more complex until some of these constraints are alleviated and dealt with, the good news is as we alluded to when these constraints are dealt with all this capital that we have coming online that Wouter touched on is going to become full very, very quickly and I think that will play out very well for the long-term.
That’s helpful. Just a follow-up here on the frac capacity. So do you have all the frac capacity available to service your customers under contract or you out there in this spot market?
So we are one of the largest buyers, if not the largest buyers of fractionation services. So we always have kind of rolling portfolios that we have, we do fractionation deals many times, we have long-term deals, we have short-term deals, we’re trying month by month to match-up our producers' production volumes with fractionation downstream at the U.S. Gulf Coast or at Mont Belvieu. I’m very confident that we can keep all of our customers products flowing here in 2018 and in 2019, we are and I mentioned earlier the good thing that we have so much connectivity, so we’re even in today’s market we’re seeing opportunistically short-term deals come by that are very attractive to us and then we will execute on those. So I’m very confident that we will keep all of our customers' products flowing in 2018 and 2019.
Great, thanks, and then just a couple of quick questions on the G&P side. What drove the sequential volume decline in the Mid-Continent and which way we kind of expect going forward?
It's up for the Mid-Continent we saw your sequentially volumes were declining a little bit we had some maintenance that we were doing in the Mid-Continent, it was up year-over-year. And then I think Elvira as you think about going forward in the Mid-Continent and I'm able to get to it I think we're looking at it being relatively flat and what that is, is that's growth in some areas like the scoop stack offset by there are some areas in the Western Mid-Continent that we're still seeing base declines and we've been in that mode for a while, so I see that area moving forward as more of a flat type of trend in Mid-Continent, but no big worries about the slight decline sequentially.
Great, thanks, and then just the last one for me again on the G&P side. You had that nice sequential increase in the south, can you talk a little bit more about the activity that you're seeing in the Eagle Ford and how we should kind of think about that going forward?
Well, I'll get broadly I have been talking about this for a number of quarters that I expected the Eagle Ford to come back because of some of the tightness that we saw in the Permian, you've seen people move rakes from the Permian to places like the Eagle Ford to places like the D.J. Basin, and so I think it is playing out as we expected. Team is doing a good job there and we're pretty confident volumes that we're seeing here right now continue to see.
Thank you. And our next question comes from the line of Jerren Holder with Goldman Sachs. Your line is now open.
Thanks, good morning. Wouter I was hoping you can give us, some of your views about NGL pricing, how do you see things shaken out over the next you know several months or so?
That's an interesting question. That we respond a lot of the time looking at NGL prices and I think we've been on a pretty wild rollercoaster ride here where we expect that things to kind of behave like they did actually in the third quarter with all the tightness that you saw NGL prices go up and then here in October I'm likely been trading down I think it's probably around 20%, 25% on the NGL prices without seemingly seeing massive differences in the supply demand side but how so, I think it's pretty interesting.
Here, Jerren, this the way I look at this we tend to not forecast short term prices. I think in the long run you're going to be always wrong when you've tried to do that game, so I think we're going to continue to see some pretty significant volatility. They may have an opportunity to go up again but I think that is not as attractive for most in the industry because if we're in a place where we're going to continue to reject more ethane as an industry, you're not really capturing a lot of that.
And to follow-up on the increase ethane rejection point, kind of what is driving that and where is that happening and why just given that you know these constraints obviously is still here?
Also right, it’s happening everywhere and I'm like a good thing about our pipes, we have a we have a very large fleet of processing plants ourselves, so we optimize those every single day, every hour of every day making sure that we get the most out of those processing plants, so we look at it and saying okay, what do you do from an ethane point of view and then you go to look at the downstream is the infrastructure available, are pipelines available fractionation available, and both of those pipelines are getting tight. Pipeline space in fractionation capacity is pretty much gone. So that means that you have to go into rejecting more ethane to optimize whatever fractionation space there is out there in the market, so that's the real reason why you're seeing it it's not because of economic reasons. Economically everybody would extract as much I think as you've got with today's prices but it is really because of what we're seeing downstream in the bottlenecks we’re seeing downstream.
Thanks, and last one for me the Sand Hills expansion, can you provide a bit more color about what do you guys mean around innovative optimization, and is there any potential for any other expansions on your other assets?
Yes, so what I'm referring to, Jerren, is if you go back to my scripts on earnings calls for the second quarter and the first quarter, we desist our teams use some technology around dynamics of points between all the different pump stations, so instead of having set points that are settling kind of set at binary levels changing based upon the flow, the product flow, ambient temperatures, other things that happen in the pipeline, we are changing all the set points on a continuous basis between all of the different pump stations that we have, really optimizing the flow and the capacity of the pipeline.
We did that on the Sand Hills earlier in the year and created some very significant capacity; the team replicated that now by doing it on Southern Hills creating another $15,000 barrels a day of capacity without spending basically any money unlike the money was very, very de minimis in the scheme of things around what capacity you create here. So great job by the team, great kind of example of what we're doing around technology and DCP 2.0 because this is something that I wouldn't have seen probably two years ago.
Any other assets maybe that we can see the technology to be applied to?
Well, we just stand on Southern Hills and those are big guys obviously in last quarter actually someone asked me and say can you do this on Southern Hills and we were right in the middle of kind of thinking through that and obviously the team was able to do it. There's probably some opportunities on some of the smaller pipes. It really depends on pipes need to be full you need to have a number of different pump stations, so you can optimize things but obviously if we can replicated somewhere else, we're going to do it.
Okay, great thank you.
Thanks Jerren.
Thank you. And our next question comes from the line of Dennis Coleman with Bank of America-Merrill Lynch. Your line is now open.
Yes. Great, thanks for taking my question. Wouter, I wonder you've said a number of times, however, you feel quite confident about how the growth will proceed today. I wonder if you might just expand on that just a little bit about, why you come to that conclusion to pose depending on which one you see are seemingly a bit inconclusive but clearly you have a quite strong view and I think it'd be worth hearing some of the details behind that?
I would say industry broadly here in the State of Colorado spent a lot of effort to make sure that we get to an outcome that is a positive outcome for State of Colorado. Assume that we spend a lot of time thinking through and polling ourselves doing different things ourselves. We've been pretty quiet around that, we've seen a number of different polls and people doing that, we spend a lot of time polling as an industry broadly not just the oil and gas industry but that's an industry broadly and given all the things that we’re seeing we're confident in the outcome of the results tonight.
Okay. And then just to follow, you did talk about in your side that even if it doesn't pass you do anticipate sort of I guess adjusting perhaps how you operate in the state and I guess there's this concept of the social license that you may want to sort of avoid the same kind of thing two years from now, what kind of things might be thinking about there more specifically?
So we're already doing a lot of that. So Dennis, think about what we're doing on Bighorn. We bought a square mile and we're going to set this plant far away from any homes from any people in a square mile so that there is no noise, there is no intrusion to people living nearby and we're going to spend a bunch of extra money to do that, but we think that is the right thing to do and is the right thing to deal with your neighbors, you will never see us build a gas processing plant near residential areas. We don't think that makes sense, we're different than many other operators from that point of view.
We're in this for the long run, we're in here for to do this for another 10, 20, 30 years and that's why we're spending money today to going to put facilities and potential move facilities in places that are away from people. So that is one thing how we're doing this.
Secondly, I think as an industry they're very committed to getting to a place where our industry and the citizens of the State of Colorado live side by side. We operate safely. We operate in a way that all of us can go exist and we think we'll probably have to come to some type of agreement with our regulators do to see how we do that and I think that is what the next two years going to be all about.
Okay, that's helpful. One more maybe this is Sean on CapEx, you talked about the acceleration of and that's obviously into 2018 now. Should we assume that it's just moving capital from one period to the other, it's not increased expense or anything that impacts returns in any way?
No. Yes, that's correct it's just moving returns are still a very good and obviously we're work earlier than on schedule potentially so that raises the returns as well.
Okay, that's it for me. Thanks very much.
Thanks Dennis.
Thank you. And our next question comes from the line of Jeremy Tonet with J.P. Morgan. Your line is now open.
Good morning. You touched a lot about the kind of downstream constraint in the industry but just want to go back to in the basin a little bit more here and the DJ producers on their calls are really talking about a tick up in line pressure here and just wondering, what this could mean for you guys as far as new opportunities for additional compression, debottlenecking or bypass, maybe quicker solution things that could help with kind of alleviating some of those line pressure issues.
I think you've seen a number of producers talk about how line pressure have come down. There are some people who have seen some more stable line pressures. Obviously, depends on where you are in the system and Mike is very large system. We process well over bcf of gas in the DJ Basin, so you can’t just kind of look at it's a one trick pony. We continue to do anything and everything to make sure that we can alleviate bottlenecks where they are, some of the bottlenecks are just a bit more growth and but I said earlier new processing capacity, more compression is not going to solve those bottlenecks.
I can have all the processing capacity at one in the D.J. Basin. if we cannot fractionate anywhere in this country which fractionation capacity is not available then it doesn't do you any good, so we talk a lot about this with producers. And I know producers spend to focus a bit on processing capacity it is much more than that. It is residue guys takeaways, it crude takeaways, NGL takeaway, its fractionation being available on its export markets being available. If any single one of those does not work or has a bottleneck all of the other ones don't work either. So more working on every single one of those.
If you go back to, Jeremy, to our Q1 earnings call we laid out of planned that will take care of the D.J. Basin well into the next decade by alleviating issues around residue takeaway and NGL takeaway, fractionation processing, et cetera. So unfortunately, this is not a hey let's try to fix this overnight. This is a structural difference between producers and midstreamers. Producers can bring along well online really quickly in a matter of weeks and months, midstreamers at times take in the year to get a permit for us to get a permit and go through the FERC to make sure that we can build giant connector and take new residue takeaway it's over a year just to get before the FERC before we try to build something.
So we're seeing that not only in a D.J. basin you're seeing this in the Permian and you've seen in the Permian for the last two or three quarters you're seeing it in a Mid-Continent, you’re seeing it everywhere in the country right now. We have had great success in the shell revolution the producers have great success. Now the midstream industry as a whole needs to make sure, how do we keep up and at the same time you also want to midstream industry not to overbuild. I spoke about that in my earlier remarks that very cautious about not overbuilding and I think the industry as a whole has shown great discipline its current cycle not overbuilding.
Understood. Just a couple quick housekeeping items, did you list what the C2 rejection you're seeing on the system was this quarter understood that there's downstream fractionation things or trying to optimize there; just wondering where C2 stood rejection? And then, also as far as nat gas marketing in LNM this quarter, how much was it this quarter or how much of that increase year-over-year?
So the first question you're asking about rejection. I don't know that within our written remarks but we saw around 50 a day just to give you a comparison. I think it was around 35 in Q2, so that's up a bit.
In terms of the nat gas side of the equation the biggest earnings that we saw in our marketing side of the equation outside of the pipeline that we talked about earlier was the Guadalupe asset it had a very strong, because of the base of spreads it had a really strong quarter; I think it was up something like $5 million, $6 million of sequential quarter and may I think was up $9 million versus last year. So that was a big driver in the marketing business was the Guadalupe asset.
That’s helpful. Thanks. And just the last one here circling back to the IDRs, if you guys don't really need equity out there, common equity and there's not a lot of distribution growth on the horizon, is there really much of incentive to pay big kind of premium to take out the IDRs here or how do you think about that grant that you're not there yet but something that seems like you're thinking about it?
Yes, I’m not going to comment on potentially what a deal would look like and what the terms are, I think that that's way too early when we’re ready to do something, you will see what that looks like, hey, in the end, I think as a company between ourselves, between the owners of the GP, we have always done what is right for the unitholders in the long-term. So I'm sure we will do exactly the same this time if we decide to do something with the IDRs.
That's all from me, thank you for taking my question.
Thanks Jeremy.
And we’re going to stay on the line for few minutes past 9’o clock and try to get through few more questions, so I request if analysts could limit to two questions each just so we can get through few more that would be great.
And our next question comes from the line of Michael Blum with Wells Fargo. Your line is now open.
Thanks, good morning everyone. Just a couple of quick questions, one on Southern Hills, so if I’m looking at these numbers right, you're running this past quarter 85% utilization if I adjust for the increase 15,000 a day you're at 78% utilization, but I guess I'm trying to figure out how you accommodate the volumes from the White Cliffs expansion?
Around Southern Hills?
Yes.
Yes, I assume that we spent quite some time thinking through what we can do there, there maybe temporary volumes that we have. Someone asked earlier the question about hi, how are you benefiting from Southern Hills and some of our companies are benefiting from that, we're benefiting from that by having increased volumes on Southern Hills.
So we are matching the profile of Southern Hills very closely to what we expect will happen if and when or when White Cliffs comes online to make sure that we have capacity in the Southern Hills pipeline and have downstream capacity as well. So we feel comfortable that we will have volumes available.
Okay. So I guess another way to ask that is, is there the potential to further expand Southern Hills or is this pretty much has renewed it yet --
There is an opportunity to further expand Southern Hills, I believe I made comments about that actually during the last earnings call and I believe we can expand probably to roughly 230,000 barrels a day.
Thank you. And our next question comes from the line of Chris Sighinolfi with Jefferies. Your line is now open.
Hey guys, happy Election Day. Sean, I just wanted to start quickly the CapEx bump, I’m wondering if you could just refresh us on your financing outlook, you guys have done quite a bit on the preferred market both in the institutional arm and through the retail side, and I’m just wondering if that remains your preferred route for 2019 financing or if other tools are sort of becoming more attractive, any thoughts on that would be appreciated?
I think the preferred is if the market's been there, we've utilized a quite a bit, Chris. We just got $110 million prefunding out there on the retail side, so that was very opportunistic, very pleased with how that deal went. So we'll continue to look at that market I will remind you we have a lot of folks have a basket of how much they can do, we have still quite a bit left on that basket 650 plus on that side of the equation.
So the flip side I think to think through is that we continue with the coverage ratio of 135 and the strength of our coverage ratio, we're continuing to be able to prefund -- or I'm sorry self fund a portion of the growth capital that we have in front of us, so I'm excited about that, excited about the cash flow that we're generating. And I think if you think going forward into next year obviously, we're not giving guidance but we do have a lot of capital coming online, a lot of growth coming online or some very strong cash flow projects. I think the trends of self funding looking at the pref market advantageously looking at the debt markets will continue. And then lastly we've got an awful lot of liquidity as I mentioned, we sold 1.2 billion, we've got that AR securitization. So I feel like we're in really, really good shape to handle the levels of growth that are coming towards us.
Great, thanks for that. If I could switch gears for my second follow-up, Wouter, I think you’ve been in a rateable wind-down in your committed NGL sales to Philips 66 for a couple of years and if my memory is correct that arrangement set to full expire in January. So realizing your full-guidance for 2019 will come with your fourth quarter results and you've also got other commitments that you've noted tethered to the Sweeney frac build in 2020 but I’m just wondering if you or Sean can walk us through any sort of preliminary expectations with regard to the NGL side of your business, what that contract roll means?
Yes, well two things. First of all, I got to thank you for the pop culture challenge you gave me last night jumping forward. I think it's tough to dig a little deep in my iTunes back to get that one figured out. But more importantly, we -- I said earlier, Chris, and like I'm very confident that we can have all of the product flowing that our producers bring to us, and so that is really what it is. I'm not going to talk individually about one contract that we have and like we have contracts with every fractionation service provider out there be it in Buston, Sweeney, Conway, Belvieu we have them all, we buy from everyone and we own a large fractionation portfolio and we're very confident that we will get -- make sure that we have all of the volumes for our producers flowing in 2019.
Thank you. And our next question comes from the line of David Amoss with Heikinnen Energy. Your line is now open.
Good morning, guys, thanks for taking the questions. Just thinking about the O’Connor plant ramping up in some of the things that you said so far on downstream takeaway and fractionation, is there any risk to the volume ramp at O’Connor specifically as you think about the [indiscernible] start-up that you could foresee on the downstream side?
We are trying to match everything together where we can, so things are going to be, things are going to be tight to in the lower 48, I think, for the next number of quarters for everyone it may, it may take 12 months, it may take 18 months of tightness that we're seeing in the market as a whole but you know we're doing a multitude of things to make sure that we have takeaway be it gas, be it residual gas, be it NGL have fractionation capacity, and again I'm very confident that when we bring that O'Connor 2 plant online that we will be able to process the volumes for our customers.
Okay, thanks. And then just thinking about 4Q 2018 CapEx again in the wide delta of $75 million swing there, if any portion of that delta dependent on 112 pass it or failing and what I mean is could you potentially further accelerate things like O’Connor 2, if 112 does pass or other projects like that, is there any swing around the both today?
Yes, so two things, there is no swing around O’Connor 2, we feel really good about that volume ramp up, it’s not really tied to 112, we’ve got great contracts behind O’Connor 1, 2. If there was a swing it would be the Bighorn plant but there really we had very little capital just some really permitting and things of that nature that we've spent some money on. So one whether it passes or not, 112 -- Bighorn and 112 are not going to change the outlook that I gave on the capital.
Thank you. And our next question comes from the line of Chris Tillett with Barclays. Your line is now open.
Hi guys, good morning. Just quickly from me on the JV distribution, I noticed those had a tick up quarter-over-quarter and there is a bullet on one of your slides about you expect that decline in the fourth quarter, so maybe can you just elaborate a little bit on kind of what's going on there and the ratability of those level of distributions going forward?
Yes, so I think the guidance we gave was $60 million to $70 million, we're -- so I'm not changing that annual guidance what happened is in Q2, Q2 was a relatively low quarter on the cash distribution, so we made up for that in Q3 and, therefore, I think Q4 will be a little bit lower. There's nothing going on that’s really driven by the business; it just gets to some of the timing of the cash flows and the working capital. So nothing to be alarmed about. Q3 just turned out to be a really strong quarter, I think Q4 will dampen but we'll be right where we thought we'd be 60 to 70 for the full-year.
Okay, thanks, makes sense. Just wanted to make sure I understood. And then on the CapEx outlook, I guess your move sounds like you're moving some maybe plan 19 spend and 2018 related to O'Connor, so as we look forward into next year should we think about maybe that level of CapEx coming down year-over-year or kind of how should we be thinking about that going forward?
Well, I think we haven’t given guidance yet, but as you think about 2019 versus 2018, couple of things, you still have some spend, we won't get all O'Connor spent this year, so you still spend on O'Connor, still some of that White Cliffs that’s so high expansion, the big ones to think about obviously are the Gold Coast Express, Cheyenne Connector, Wouter talked about once we get past the FERC, you'll see some capital there.
So we'll give more guidance more detail here on our next call but the way I would think about it is we still have a pretty good solid program of capital staring at us in 2019 and these are all some really strong really, really strong projects.
Thank you. And our next question comes from the line of Selman Akyol with Stifel. Your line is now open.
Thank you, couple of quick ones from me. I know you said in terms of 112 that is defeated it wouldn’t be business as usual, you'd be looking for sort of a more sustainable solution longer term. So my question relates to Bighorn and FID. So if it gets defeated, should we expect that to go to FID pretty quickly or would you be looking for more direction more outcome on with that sustainable solution as before proceeding with the Bighorn?
I think we are doing everything from our side to make sure that we can put Bighorn, that we can FID Bighorn but we’re going to kind of look through this election, see what happens and decide after that. So I don't think you're going to see us FID things in the next couple of weeks or so, it may take longer but what I can tell you that behind the scenes we will continue to do anything and everything in our power to make sure that we can get to the timeline that we've already laid out which is to first half of 2020.
Okay. And then just little bit different on the cash receivable securitization facility, I presume that lower cost of capital, but was it more opportunistic that it came up and it has kind of got one year life, do you expect to extend it, would you expect to increase it if you could, could you just talk a little bit about why that?
Lot of questions there, it was more economical about 75 bps cheaper than our facility, so that's a no brainer. The one year is just set up as a one year extension; we do anticipate continuing to extend it. And in terms of how it showed up obviously we've got really good relationships with our banks, we had a couple of banks in particular that really specialize in those products and they really saw us as a potential customer.
So we're pleased to have it, it adds liquidity, it adds cheaper liquidity and I believe we’ll continue to extend that on an annual basis.
Thank you. And that concludes today's question-and-answer session. So with that, I’d like to turn the call back over to VP, Investor Relations, Irene Lofland for closing remarks.
Thanks, Andrew, thanks everyone for joining us today, please feel free to give me a call if you have any follow-up questions. Have a great day.
Ladies and gentlemen, thank you for participating in today's conference, this does conclude the program and you may all disconnect. Everyone have a wonderful day.