Growth Projects and Cost Savings Help DCP Midstream Partners, LP Overcome Weaker Volumes

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DCP Midstream Partners (DCP) is more sensitive to commodity prices than most other MLPs because a greater percentage of its earnings come from commodity-based activities. This direct exposure is having an impact on its earnings this year, particularly since some of the hedges it had in place for protection have expired. That said, the company is working hard to mute its exposure in other ways, including building additional fee-based assets and cutting costs. Those two infinitives paid off during the third quarter by offsetting some of the losses elsewhere.

DCP Midstream Partners results: The raw numbers

YOY = year over year. Data source: DCP Midstream Partners, LP.

What happened with DCP Midstream Partners this quarter? 

DCP Midstream Partners is building new income streams:

• The natural gas services segment's adjusted EBITDA slumped 25.4% year over year to $100 million. Driving the decline were the expiration of some of the company's commodity price hedges, lower volumes in its Eagle Ford and East Texas systems, and the sale of its North Louisiana System. Partially offsetting those issues was growth in the DJ Basin system, an improvement in its natural gas storage asset in Southeast Texas, and lower operating expenses.
• NGL logistics' adjusted segment EBITDA edged up 4.2% to $50 million. Driving the increase was higher volumes on the Southern Hills and Sand Hills pipelines, increased NGL production from new plants placed into service, and earnings from the Panola Pipeline, which more than offset higher operating expenses due to maintenance at its NGL storage facility.
• The wholesale propane logistics segment's adjusted EBITDA fell to $2 million, which was down from $6 million in the year-ago quarter due to lower margins and propane sales volumes.
• During the quarter the company placed its Panola Pipeline expansion into service and completed the sale of its non-strategic North Louisiana system.

What management had to say 

CEO Wouter van Kempen commented on the quarter by saying:

This quarter, the partnership delivered significant operating cost savings and growth in fee based assets, which more than offset anticipated volume declines. Our unwavering DCP 2020 strategy execution and operational excellence focus are substantiated by our strong safety and reliability results, lower costs, and increased fee based earnings. Looking forward to 2017, we will continue to have a steadfast focus on creating value for our unitholders, customers and employees.

One of DCP Midstream's aims in its DCP 2020 strategy has been to grow its fee-based asset base, which will generate a growing supply of stable cash flow to offset hedges as they roll off. It has already brought several projects online this year, including the Grant Parkway gathering system and the Panola Pipeline. These projects have pushed the company's fee-based margin up from 60% last year to 75% this year, and it should hit 80% next year.

Midstream companies continue to strategically focus on reducing their direct exposure to commodity prices by building or buying additional fee-based assets and selling those exposed to volatility. For example, Williams Companies (WMB -0.66%) and its MLP, Williams Partners (NYSE: WPZ), reported a double-digit rise in distributable cash flow during the third quarter due in part to recently completed fee-based projects. Meanwhile, Williams Partners is planning to invest up to $5 billion over the next two years to build additional fee-based assets. Finally, Williams Companies and Williams Partners both recently sold their Canadian assets and are looking for ways to monetize a petrochemical plant to reduce their direct exposure to commodity prices.

Looking forward 

One of the fruits of DCP Midstream's growing stream of fee-based cash flow is that the company sees its distributable cash flow coming in above guidance. The MLP initially thought distributable cash flow would be in the range of $465 million to $495 million. However, it is increasing its guidance to between $515 million and $525 million. That gives it more breathing room to support the distribution, which it would have fully covered at the midpoint of the initial guidance.