So what does DCP stand for?

For the record, the initials in DCP Midstream Partners LP do not stand for Dropdown Central, Pipelineland, though a casual observer might be forgiven for making that assumption about the Denver-based master limited partnership (MLP).

“We just announced the largest dropdown in the partnership’s history,” the company’s chairman and chief executive, Wouter van Kempen, told analysts during a recent call to discuss fourth-quarter and full-year 2013 earnings. “The $1.15 billion transaction includes the one-third interest in Sand Hills and Southern Hills pipelines, and the remaining 20% of our Eagle Ford business and the Lucerne 1 Plant in the DJ [Denver-Julesburg] basin.”

Good times will continue to roll, company President Bill Waldheim made clear on the call, with an acceleration of
the asset dropdowns from its parent.

“We are now targeting approximately $1.5 billion of dropdowns from DCP Midstream,” he said. “We are also forecasting about $500 million of organic growth projects to be executed during [2014], for a total drop in growth forecast of about $2 billion.”

The company is up, coming and expanding its footprint in the DJ basin, Eagle Ford and the Permian basin.

Distributable cash flow for the master limited partnership in 2013 soared to $296 million, or 64% above its 2012 total. Expectations for 2014 are as high as $420 million, Waldheim told analysts. Market capitalization has ballooned to more than $5 billion from $265 million since 2008.

Definitely constitutes potential

The happy tone in the DCP Midstream Partners call stemmed from the possibilities evident in the dropped down assets.

“We are happy with our performance in the Eagle Ford and excited to now own 100% of these assets,” Waldheim said.“The 35 million cubic feet (MMcf) per day Lucerne plant extends our position in the DJ basin and is another fee-based
plant operating at capacity. We are really pleased to have acquired Sand Hills and Southern Hills into the partnership, asthese pipelines are quality fee-based assets with a strong growth profile, both of which ramp up into 2016.”

The most interesting aspect of this pickup might be what is missing.

“Business development across both pipelines is incomplete,” Waldheim told analysts. “We are continuing to add laterals and extensions to tie into new supply sources, further ramping up volumes on these pipelines. We have identified
over $200 million of opportunities to connect DCP Midstream and other third-party plants into these pipelines, which are not part of the base case. So, needless to say, we are excited about the future earnings potential of these pipelines.”

Past earnings haven’t been shabby either. The company’s EBITDA for fourth-quarter 2013 jumped $6 million over the fourth-quarter 2012. For the year, the total of $365 million set a company record and beat 2012’s figure by $63 million. Revenues for 2013 were close to $3 billion, and the company’s market capitalization is around $5.2 billion.

The general partner, DCP Midstream LLC, was formed in 2000 with the combination of natural gas gathering and processing businesses of Duke Energy and ConocoPhillips. Spin-offs of those companies—Spectra Energy Corp. and
Phillips 66 Co.—own DCP Midstream, each with a 50% interest. DCP Midstream has a 19% interest in DCP Midstream Partners, which has traded on the New York Stock Exchange since 2005 as DPM.

Driving continued profitability

Not content to grow the company only from general partner contributions, the leadership team plans a $500 million boost in organic growth in 2014, about half of it to be poured into the Keathley Canyon Pipeline, offshore Louisiana, and Lucerne 2, a 200 MMcf per day cryogenic gas processing plant in the DJ basin.

“Not only will Lucerne 2 be the largest plant in the DCP Enterprise’s nine-plant DJ system; when it goes into service,
DPM will own about half of the DCP Enterprise’s 800 MMcf a day of capacity in the DJ,” Waldheim said. “That’s a great position in a prolific growth area.”

Both Lucerne plants are anchored by long-term minimum throughput contracts from DCP Midstream, DCP Midstream Partners’ general partner. That means that the projects are de-risked. Both Lucerne plants will be connected to the Front Range pipeline for natural gas liquids (NGL) takeaway through Texas Express and delivered to the Mont Belvieu, Texas, NGL market, Waldheim said.

Sean O’Brien, the new chief financial officer, echoed Waldheim.

“We are seeing very strong volume growth in the Eagle Ford,” he said. “We are also seeing a nice ramp-up in NGL production in the Eagle Ford and other areas, due to higher volumes and improving recoveries from what we saw just a year ago. These improvements are offsetting volume declines in certain of our lower-margin areas.”

The addition of the Sand Hills and Southern Hills pipelines will lift the company’s fee-based margin to 55% in 2014 from 50% in 2013. “We expect to see strong growth in [the NGL logistics] segment with the announced dropdown of Sand and Southern Hills pipelines, the startup of the Front Range pipeline and ramp-up of Texas Express,” O’Brien said.

And the dropdowns reinforce the company’s commitment to sustainability.

“We build to operate for the long term,” Richard Bradsby, vice president, Midcontinent business unit for DCP Midstream, said recently at Hart Energy’s DUG Midcontinent conference in Tulsa, Oklahoma. In his previous position, Bradsby oversaw development and construction of the Southern Hills NGL pipeline.

Denver, Colorado’s pride

In first-quarter 2014 DCP Midstream Partners placed its Goliad plant in the Eagle Ford, with 1.2 billion cubic feet per day of processing capacity and the Front Range pipeline (435-mile pipeline from Weld County, Colorado, to Skellytown, Texas) into service. The company’s O’Connor plant in the DJ basin’s Niobrara has 110 MMcf per day in service and another 50 MMcf per day in startup mode. And there’s plenty of time left in the year for deployment of $500 million of growth projects and over $350 million in dropdowns.

“We have more than doubled the size of DCP over the past several years,” Waldheim told analysts. “And with the potential for $3 billion to $5 billion of dropdowns coming to DPM between 2014 and 2016, along with our strong slate
of organic projects, we could double it again.”

Joseph Markman can be reached at jmarkman@hartenergy.com or 713-260-5208.

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