Tom O'Connor - DCP Midstream - Chairman, President & CEO

Transcription

1 I'm John Arensdorf, Vice President of Investor Relations at Spectra Energy. I'd like to welcome you to today's discussion of DCP Midstream. We're going to hear the perspective on DCP Midstream's business from its CFO, Tom O'Connor and -- that's CEO, Tom O'Connor, and CFO, Rose Robeson. Rose Robeson - DCP Midstream - CFO [Talking about me]. Yes. Rose is hoping I was going to introduce her as the CEO. Anyway, I do want to remind you that today's discussion is being webcast. So, when it comes time for the Q&A, I'm going to ask you to be sure that you let somebody bring a microphone around to you so that the folks on the call can hear the Q&A as well. I'll also remind you that after the presentation today, we're going to have a reception, cocktail reception downstairs on the second floor in the Fountainebleau Room and you'll have some time -- some additional time with Tom and Rose at that point if you'd like to join us then, and we hope that you will. Also with us today from DCP Midstream, are Irene Lofland, the Vice President and Treasurer. Bill Waldheim, the Group Vice President, Commercial for DCP. And out at the table, as you were coming in, is Justin Rencurel, who is working with Patti and me in Investor Relations at Spectra. With that said, let's move on to the obligatory Safe Harbor Statement. I do need to remind you that some of the things that we're going to be talking about today will be forward-looking within the meanings of the securities laws. Actual results may materially differ from the things that we're talking about today. And you should refer to the additional information contained in Spectra Energy's SEC filings for factors that could cause the results of today's discussion to be different from those contemplated, or the actual results to be different from those contemplated in today's discussion. In addition, we're going to talk about some non-gaap financial measures as defined by SEC Reg G and there's a reconciliation of those on our website and in the back of the handout that you have with you here. So without further ado, let's get started. And I'll turn things over to Tom O'Connor. Well, good afternoon, everybody and thank you for being here today. It's certainly been an exciting time in the market. So, I appreciate you taking the time to listen to our story here today. Today is really going to be a conversation about the Midstream business and DCP in particular. My goal here today is for you to get a better understanding of our business, understand how we

2 make some money, learn about our assets. It really is a great time to be in this business and it's a very good time overall. The overview, we'll move from general to more specific. We'll start with the fundamentals of the midstream business and then start drilling down into our Company, looking at our assets looking at the basins that we're active in and then start looking at some of where we're focused and some of the opportunities that we have and some of the challenges that we have. Rose will come up and talk about the financials. And then of course, we'll open it up for your questions. Everything I'm going to cover today is more or less on a consolidated basis. And that will include our ownership in DC Midstream Partners. Now, some of what I'll get started with here is pretty basic. Some of it may be very familiar to you. But it will help you understand, I think, some of the things that we focus on around the operations, around our contracts, around efficiencies, around well connects, et cetera. So, let's get started. Gathering and processing is really a must-run business and that's one of the reasons that we like it. There can be price swings in the commodities, there can be sensitivities to the level of drilling, but virtually all gas passes through a gathering system and about 75% of the gas in the US is either processed or receives some level of treatment. E&P production is our feedstock and we provide the services that producers need at the locations at that they drill, and try to maximize the value of their production by creating the highest value products. When we gather and process, it results in two constituent components, residue gas and natural gas liquids, or NGLs. And each of these product streams goes through separate pipelines, storage and demand supply balancing steps as they find their way to end-use customers. All of these are part of a critical infrastructure, and as we've learned over the last couple of weeks, everything has to work for everything to work. Let's take a look at a gas plant and I'll talk to you a little bit about how these work. When a producer decides to produce gas from a formation that includes elevated NGLs or contaminants, he's decided to process. That's why we call this a must-run industry. Condensate, which is the heaviest of the liquids, is taken out, up front of the plant. That basically drops out as a result of pressure changes and temperature changes. The processing facility then basically cools the gas stream, to separate the gas from the liquids and then they both go separate ways. Now, there's a couple of different types of processing facilities and that will result in the -- contribute to the amount of extraction that we'll see. A simple refrigeration type plant will remove all the propane plus liquids and essentially, just gets the gas stream to a level that it can meet the pipeline specifications. A deep cut cryogenic plant will remove virtually all the C3 Plus, which is the propane plus, at about 80% to 85% of the ethane. Most of DCP's midstreams facilities fall in this category. And with the ethane spreads that we have today, it's very attractive to remove the ethane from the gas stream. When we have CO2 and other contaminants like sulfur, we pass it through an amine treating system, to remove those contaminants. And then, additional process occurs downstream on the NGLs and it's called fractionation, which breaks the combined NGL stream into separate products for downstream consumption. While the technology is pretty rudimentary, it's pretty well understood. The challenge is day-to-day around different gas quality, around the mechanics of the plant and around efficiency of liquids capture are the real things that operating people wrestle with every day. This next slide shows what a typical raw gas wellhead stream will look like. And in addition of methane, it includes other heavier hydrocarbons and impurities. The percentages are going to 2

3 vary across the formations, but what we're showing here is pretty typical. Our job is to extract the hydrocarbons, separate out the impurities and render the gas, now mostly methane, suitable for pipeline deliveries. In the process, we increase the value of the raw gas by providing two quality product streams, natural gas and natural gas liquids. If we go to a typical NGL barrel, this is what it would look like on the left. This composite NGL mix, we sometimes call a Y-grade, is separated into its various products through the fractionation process. Now, we have fractionators along our system, located where there are local markets. For a lot of our product, it moves down the pipelines to Conway, Kansas and Mont Belvieu, Texas, where there are large fractionation facilities at those locations. The component products of fractionation are used for different purposes. Ethane is predominantly cracked for use in polyethylene plastics. Propane can be similarly cracked or used as a blending, are used for home heating and industrial burners. Butanes can be cracked or used as a blending agent in refineries and natural gasolines are blended with other refinery products and used as additives to gasolines. So, there you have the product stream, we've gone from raw gas, through the processing, through the fractionation and into the various components. Let me now talk to you about how we make money. Our services are provided under three main types of contracts, fee contracts, percent of proceeds and keepwhole. Our current contract mix is dominated by POPs or percent of proceeds, from which we derive about 70% of our margin. Under POP contracts, we keep a percentage of the liquids and the gas and return the rest to the producer. The percentage splits between ourselves and the producers are going to vary depending on the amount of liquids in the gas, the amount of services we're providing and a whole host of other factors. Our keepwhole contracts will contribute about 10% of our margin this year. If you recall, that's down from about 15% in And under keepwhole arrangements, we keep the liquids produced and replace the equivalent amount of natural gas. And this results in a long NGL position and a short gas position. And as I should have mentioned, under POP contracts, we are long, both commodities, long liquids and long natural gas. And finally, we have fee-based contracts, which are about 10% of our margin and under these contracts, we're paid a fee for the service that we're rendering. We don't have commodity exposure. We're seeing more and more of these contracts appear around some of the newer developments, like the Barnett Shale and in the Piceance, and we also get paid fees for transportation on our intra-state pipelines. The remaining 12% of our margin comes from other sources, such as condensate sales and NGL gas marketing activity. There really are two things to remember as you think about these contracts. First of all, we share the liquids and the gas and thus our earnings are going to fluctuate with the commodity. And taking into account all contracts, we are long NGLs and long natural gas. And while we do pay a lot of attention to the frac spread, we really pay attention to the absolute price of liquids and gas. Let's take a look at our customers. We have over 2,500 customers and over 12,000 contracts. Our customers fall into three main categories. On the supply side, you'll recognize these names as large integrated oil companies, the large independent gas companies and a lot of smaller to midsize producers. Our residue gas is sold through a number of different marketing companies under the contracts priced monthly and our top five customers are shown here. Now, over the last couple of weeks, a couple of these folks have had challenges around some of their credit issues and I want you to know that we've moved quickly on that. We're in the process 3

4 of dialing back some lines of credit and getting fully collateralized around these customers. And we feel pretty good about where we are. On the NGL market side, we have several long-term contracts with end-users for a large portion of our barrels and the balance is sold at Conway and Mont Belvieu market centers at spot prices. And while different customers have different desires and different preferences, it really comes down to a competitive price. It comes down to reliable and efficient service. And it comes down to delivering quality products around their residue gas and their liquids. If we look at some of the challenges and the opportunities in this business, in the overall market environment, our belief is that we'll see continued strength in natural gas and crude oil prices. In the near term, we may see some weakness in gas prices, but most forecasts are projecting $8 to $9 range longer term. And particular support coming from gas demand growth in the power sector. We also expect to see NGL prices and frac spreads remain favorable, given the crude oil/natural gas relationship. And in this environment, we believe that drilling will continue to be strong both in the developed areas as well as some of the new emerging plays. That should keep our existing assets full. And it should start -- continue to see growth in the need for additional large-scale infrastructure, particularly in some of the new plays that are being developed. But the favorable environment also comes with challenges. Our competition has expanded. We've seen several new MLPs move into the midstream space. Although that has been tempered somewhat by some of the access to capital and the challenges around that that some of these folks are seeing. And like many in the energy space, we're seeing rising costs for our projects, rising costs for -- and competition for talent. And what that does is increase the cost of our services and cause us to have challenges in executing around some of the projects. Notwithstanding, we're optimistic about the prospects for the growth in the midstream business, driven by the strong fundamentals for natural gas and NGLs. What I'd like to do now is turn to some of the specifics around DCP Midstream and Partners. I'll give you some background around the business, some detail on our assets, discuss some of the things that we're focused on and some of what we think really matters. And then, we'll look at some of our growth plans. If we start with our corporate structure, I think you know that we're a 50/50 joint owner arrangement between Spectra and ConocoPhillips and we are fully self-funded. We're also the general partner for Midstream Partners, which provides us an efficient, tax efficient funding vehicle and I'll discuss the MLP a little bit later. DCP is the largest company in the midstream space, based on net income from publicly available information. And by any metric, this is a significant enterprise. The history of this Company is an amazing story. Its grown significantly since 1992 with several key acquisitions establishing the foundation of what you see today. It would be very, very difficult, if not impossible, to duplicate the diversity of customers, supply basins, assets and people that make up this Company today. Importantly, the acquisitions of Associated Natural Gas, Mobil, UP Fuels and GPM were completed prior to the significant run-up in price that we've seen since And what that means is we've gone from a EBIT of about $200 million in 2002 to a budgeted EBIT of $1.5 billion this year, 2008, and as Rose will tell you, we're expecting to significantly exceed our 4

5 budgeted EBIT based on our year-to-date performance. And the returns in this business will be north of 30% this year. If we look at our asset base, it really is unmatched. We own and operate 52 gas processing facilities, 10 fractionators and own over 59,000 miles of gathering and processing or gathering and transmission pipeline. Year-to-date, you can see our statistics. The one I'd point out is 375,000 barrels of NGLs per day and that is number one in the country by a significant margin. This asset footprint provides us a lot of advantages. It's size and location. We have a lot of touch points with our customers. We have the scope to bolt-on or we can step out into some of these new areas. Our extensive customer base mitigates our exposure to any one company's drilling strategies. And as Rose will show you, our cash generation is very strong in the current price environment and our balance sheet is relatively unlevered, which gives us the opportunity to execute on the strategy that we've laid out. So, let me take a quick dive into each one of the regions, tell you a little bit about what's going on in some of these areas. First up is the Gulf Coast region. This is our largest region in terms of volume. We have 17 plants, 8 fractionators and over 11,000 miles of pipeline. About 40% of the Company's G&P volumes are handled by this region. But only about 30% of the NGL production, and that goes to the relatively leaner content of the raw gas produced in this region. We're seeing strong drilling activity in east Texas, south Texas and the developing shale plays. These plays include the East Texas, Cotton Valley and Bossier plays. We're seeing continued development in the Barnett Shale around our Tolar assets that we acquired from Momentum in As you're all aware of, the early success in the Haynesville Shale. So overall, when I think of the Gulf Coast, I think of a steady base with some real upside from some of the conventional as well as non-conventional developments. In the Mid-continent, this is our largest collection of assets and our biggest earnings contributor. We own 27,000 miles of gathering lines and 11 processing facilities. And we gather and process 1.9 trillion Btus a day and produce 120,000 barrels of NGLs. When you look at the Midcontinent, some of the activities are strong drilling in This is our second year in a row with over 600 well connects on the system. To accommodate these new volumes, we've had to restart our Cimarron plant, adding 60 million a day of processing capacity. And we have several debottlenecking projects on the -- underway and on the table. And we're seeing further definition of the Woodford Shale, in the area of our Central Oklahoma assets, which is going to require additional gathering and processing needs. The Mid-continent has a very stable base of mature production and we've got some new and exciting activity in the panhandle of Texas as well as the Woodford Shale play. If we look at the Permian, this is the richest gas in terms of NGL content of any on our system and it's also an area where we process a significant amount of sour gas. Here, we own 16 processing facilities, 17,000 miles of pipe. We gather and process 1.2 trillion Btus a day and produce about 119,000 barrels of NGLs. This is primarily an oil play and it's driven off oil prices and with the strong oil prices, we've seen significant drilling in this area. It's also very rich in liquids. We see liquids content at about 3 to 4x of what we see in the Gulf Coast. Activity in this area has been primarily around the Wolfberry play, with a strong uptick in well connects, we'll do over 250 this year. We're also seeing some testing of a Barnett/Woodford Shale resource in the Delaware Basin. It's prospective at this time, but it is within reasonable proximity to our facilities. Elevated drilling 5

6 here in the Permian has pushed most of our assets to full capacity and we're now looking at starting up one of our existing mothballed facilities. We turn to the Rockies, much smaller asset base here in the Rockies, but quite a bit of activity going on. In the DJ Basin, we're seeing significant growth opportunities from strong drilling and well recompletion activity. Again, this is an oil driven play. Here, and you'll see -- you'll hear me talk about it in a few minutes, we're planning on adding significantly to our capacity. In the Piceance, Midstream Partners will expand its gathering system that it acquired from Momentum in 2007 in the Collbran Valley. And again, there we're seeing some very strong drilling in this area and that project, which I'll also cover in a few minutes, should be online in But hopefully as you see from this deeper dive around our assets, we have a lot of activity around the assets. We have critical mass. We're positioned to be very efficient and we're positioned to compete effectively. And we believe with this asset base, we can deliver long-term value through both strong commodity cycles as well as weaker commodity cycles. What I'd like to do now is turn to the future and talk to you a little bit about our strategy, about our strategic initiatives and some of our project opportunities. Coming into 2008, we were positioned to take advantage of growing volumes and a pretty strong price deck if we executed in our operations and kept our facilities running well. I'm pleased to say that we've made significant progress year-to-date in terms of operational reliability, which has allowed us to turn outward and look to some of the next round of growth opportunities that we see emerging in this business. This next slide shows our strategy. It's pretty simple, but it's focused and it's proving to be very effective. Our goal is to establish a foundation of reliable, efficient and safe operations and from that foundation, grow the business. Reliable and efficient operations is where you gain the confidence of your customers by delivering on their volumes day-to-day. It's about where you get the most out of what you have on the ground and to me it's where you earn the right to grow. Our belief is if we get to this point, our customers will value our service, steer business our way, both within the footprint as well as in some of the new areas that they're looking to enter. If you look at our near term initiatives, they align well with our longer-term strategy. It starts with operating metrics that matter to our customers. It s mechanical integrity, it's keeping process Btu consumption low, it's safe and environmentally responsible activities. This is the blocking and the tackling of the business. We also realize that in today's environment, cost does matter. We -- and we have to stay disciplined in our approach to costs. We've got several initiatives underway this year to control our costs and although we will focus on costs, we will continue to invest in our assets to ensure that we deliver on our service quality expectations. There's several opportunities to grow the business and we're working with our customers to accelerate expansions, well connects and volume growth. And in addition, we're looking to grow the enterprise through greenfield projects and value-adding acquisitions. If we turn to the operations for a minute, when I talk about reliability, it's really about keeping the compressors, the process equipment, up and running. It's keeping the gas moving to market. I think of us as a manufacturer in process. We only get paid when we run. When we run better, we make more money and our customers make more money. When we don't run well, nobody makes much money and our customers are not very happy. 6

7 Our reliability performance in 2008 has improved dramatically. And we have several initiatives underway to further improve on lost profit opportunities. When I talk about Btu efficiency, I'm referring to the thermal value difference between what comes into the system as raw gas and what leaves the system as residue and NGLs. This difference is the fuel we consume. It's the gas that escapes the system through leaks and flares. Keeping this number low preserves real value for us and real value for our customers. And we investment consistently in Btu efficiency, and it really pays off in preserved markets. If we turn to growth opportunities, as you can see from this slide, we've got several opportunities around the footprint to build out our gathering and processing systems. And a number of these are currently in flight. Opportunities are spread throughout the system and are being driven by the extensive drilling activity. Our strategy's pretty simple. It's to grow with our customers, be ready with the capacity when they need it, help them get their gas to market on time. These bolt-on projects as we call them, are typically short term, from the time you think about them until the time they're in service, is usually less than 18 months. And they are low risk and high return. And as we look around the system with what we have on the table, our expectation is that DCP can invest close to $1 billion in bolt-ons over the next three years. As I showed you earlier, our assets are ideally situated to capture volumes from the expanding and emerging shale plays. These plays are getting intense focus from natural gas producers and that's great, because in most cases, some level of gathering, some level of processing and treating is going to be required. The emerging challenge to me is the sheer speed at which these volumes in these developments are progressing, and the significant capital commitments that are going to be required to service these volumes. The existing asset base, to the extent they're there of small pipes distributed processing, is just not going to meet the need. Large scale facilities brought on quickly, brought on efficiently, are going to be what is required. So, let me turn now to some of our projects. Some of the bolt-on projects, some of the developments we're looking to -- in the larger scale infrastructure for some of these shale plays, I think you'll agree when you see it that we've got several great opportunities underway. In the Barnett shale area, we continue to build out the Tolar assets which we purchased from Momentum in By early 2009, we will have added two trains with a capacity of 80 million a day. And we have a third plan on the drawing board. That will bring our total capacity to 160 million a day. In the DJ Basin north of Denver, we just announced plans to significantly expand capacity here. And for the last couple of years here, we've de-bottlenecked, we've added smaller increments of capacity. But all our processing is running absolutely full at this point. So now, we're expanding the facilities through the construction of two new plants, adding 150 million a day of capacity that will be in service in In east Texas, jointly with partners, we recently announced plans to construct a 30-mile, 20-inch extension of our gathering system to access a new developing area as well as the Minden Field. We have open capacity at the processing facility, so we can get this gas to market quickly when this pipeline is completed in the first half of In the Piceance, we recently announced that Partners, through its joint venture, will construct a 20-mile, 24-inch expansion of its Collbran Valley system. This pipeline will transport the growth 7

8 and volumes from Plains and Delta drilling in this area. This really is a great fee based project for partners and will contribute to earnings in the new year. Partners also announced that it had entered into an agreement to purchase Michigan Pipeline and Processing, a privately held company engaged in natural gas gathering and treating in the Antrim Shale in Michigan. The treating assets have a very nice franchise position, basically removing C02 from the gas. And they treat over 50% of the Antrim Shale production. This acquisition will provide immediate accretion and future growth opportunities for Partner's unit holders. We expect to close on this in October. In August, we announced that Midstream Partners would construct a -- it's a proposal to construct 150 mile, 1.5 BCF a day pipeline known as the Haynesville Connector. Basically, to move Haynesville Shale gas to either the Perryville or the Delhi hubs. We believe this is the exact type of large scale infrastructure needed to move the significant volumes to a key liquid take away point. Leveraging off our Pelico position, we have the ability to phase the project, provide multiple interconnects and multiple market access. The reception to the project from the producing community has been pretty good to date. And we're looking now to secure the long term capacity agreements that would support the construction of this project. And finally, we're keeping a watchful eye on the Marcellus Shale developments. It's early in the development cycle, but we really don't think it's too early to be thinking about how the gathering and processing facilities should be cited. Our belief on Marcellus is that the infrastructure could be quite large. The challenges will be significant. It's a huge area. There's going to be differences in gas quality to be dealt with. It's going to be a significant amount of investment. But we believe with our experience and our scope and our scale, we're ideally suited to participate in the Marcellus Shale development. We also see here that the Spectra assets are located right in the middle of the play. So, while it's early, we're interested. We're spending quite a bit of time and we're focused on participating in the Marcellus. If we take now a brief look at Midstream Partners, our MLP, provide you a little bit of information here. Partners was IPO'd in 2005 and it has delivered very nice growth in distribution since then. As we think about Partners, it does several things for us. First of all, although the capital markets have been challenged, it is a financing node for us. Second, it gives us a vehicle to compete in areas where we've seen MLP economics set the competitive bar. And third, it gives us the ability to monetize assets through dropdowns when we believe that it's strategically advantageous to do so. But let me assure you that Partners is about growing the enterprise. We do believe that a well designed plan of periodic dropdowns of the right assets will provide Partners with an advantaged currency over time. But dropdowns are really a means to an end. And that end is growing the enterprise. Partners has been busy since their formation, having completed or having under construction about $1 billion in asset transactions. What's encouraging to me, and should be encouraging to the unit holders, is that they've been successful on all fronts -- dropdowns, third-party transactions and greenfield development. This balanced approach will ensure that we have continued and predictable growth while being well positioned to take advantage of the asset cycles which will certainly occur. Looking forward to new build outs at Lake Murvaul, at Collbran and on the recently announced entry into the Antrim Shale should continue to support distribution growth in

9 In summary, there's a couple of key themes that I'd like to leave you with, and then we'll get Rose up here, is this business is in a good place. We're enjoying the benefits of high commodities and strong drilling. And that really is not an accident. This business is set up and positioned to prosper in a rising commodity environment. As commodities moderate, and they will, our diversity of assets will ensure that we continue to prosper over the long time. Hopefully, you'll derive some comfort from seeing that we're focused on the operations, improving the performance of what we had, investing in performance as some of the best returns that I can find. We're focused on growth opportunities at Midstream and Partners. We intend to participate in the infrastructure build out and we have the balance sheet to do so. We're focused on our customers. My belief is that if they prosper, we'll prosper. And so, we're trying to meet their needs with efficient processing and quickly bringing their new volumes to market. In sum, we're focused on value creation for Spectra and ConocoPhillips. Whether it's improving returns, generating cash, growing the Company or growing the GP contribution, these are the levers that we have at our disposal. And we intend to use them appropriately. So with that, let me turn it over to Rose and she'll cover some of the financial data for you. Rose Robeson - DCP Midstream - CFO Well, thank you, Tom. And in this section, I'll really cover our financial performance, talk a little bit about our credit metrics and liquidity. And also talk about our commodity sensitivities. As you can see from this slide, we have had strong earnings and excellent returns over the last few years. Certainly with high commodity prices, our competitive contracts and a favorable outlook for commodity prices in the near term, we look to continue this trend. We expect our 2008 EBIT to exceed $1.5 billion, as that plan was based on $83 crude oil. And return on capital employed will exceed -- is expected to exceed 30%. In addition, our credit statistics remain strong reflecting our solid financial strength. In fact, recently Fitch upgraded us to BBB plus from BBB, reflecting the strength of our credit metrics relative to our peers. So, let's move to the next slide to go over our debt and credit facilities. DCP Midstream currently has $2.3 billion of long term debt outstanding. Our nearest bond maturity is in In addition, we have a $450 million revolving credit facility which is used to support our commercial paper program. As of June 30, we had over $415 million of available capacity on our facility. And our availability really has not changed significantly since June 30. Our credit facility has one financial covenant, that is a leverage covenant of 5 times debt to EBITDA. And as of June 30, our leverage covenant was less than 1.5 times, highlighting the strength of our balance sheet and our overall financial flexibility. Additionally in April of 2008, we entered into a $300 million, 364-Day bank loan to partially fund the special dividend that we paid in April of 2008, the $500 million dividend to our parent companies. And we are planning to take that loan out in a capital market prior to maturity. In addition to DCP Midstream's long term debt shown in this slide, DCP Partners has an additional $660 million of outstanding debt under its credit facility, of which $220 million is fully collateralized Lakehead debt. 9

10 So, let's talk now about our financial plan summary. A lot of this information on this slide we shared with you earlier in the year. And so, I won't go through every number. And we also have told you that we do expect to exceed these numbers. So really, I think the most important thing to focus on, on this slide, is our commodity sensitivity. And as you can see on this slide, our sensitivities for the full year of 2008 is for $1 change in crude oil prices would have a 12 month EBIT impact of $24 million. So, $1 increase in crude would have a positive impact of $24 million. For natural gas, $1 change per MMBtu in natural gas prices would have a $40 million impact on our EBIT. Again, a positive dollar change is a positive $40 million. So, in the current pricing environment, about 90% of our margin is commodity sensitive and about 10% is fee based. At Midstream, we currently do not hedge our G&P business as our parents really prefer to retain the upside on commodity prices. And also just due to the strength of our financial position, we can cover our cash requirements down to as low as about $30 crude. So, let me turn to the next slide and walk you through a detailed example on how to model our commodity sensitivity. This slide probably looks familiar to you. If you saw Spectra's second quarter 2008 earnings call slides, this slide is the 100% version of what Greg Ebel reviewed on that call. And again, this is not a forecast. This is an example for you to use in order to understand our commodity sensitivity. So in this hypothetical case, we assumed the price of crude is $100 per barrel, our budget was $83 per barrel. And natural gas is $9 per MMBtu versus our budget of $8 per MMBtu. In addition, we assumed the correlation between the price of crude and natural gas liquids has decreased from 60%, used in the 2008 plan, to 55%. So, you can see on this slide how we apply our sensitivity to changes in crude, the NGL and crude relationship and natural gas prices. For the crude price change impact, we take the hypothetical change in price of $17 and multiply that times our sensitivity to $1 change in crude of $24 million for a hypothetical 12 month EBIT impact of a positive $408 million. For the correlation of crude and NGLs, we take the decrease in correlation of 5% and multiply that times our sensitivity to a 1% change in correlation of $30 million for a resulting hypothetical 12 month EBIT impact of a negative $150 million. And lastly, we take the change in natural gas price of $1 and multiply that times our sensitivity to $1 change in gas of $40 million for a hypothetical 12 month EBIT impact of a positive $40 million. So overall, this would result in a 12 month EBIT impact of $298 million. And again, this is a hypothetical example and is not our current forecast. So, let's move to the next slide and talk about cash flow. You can see from this slide, we have historically distributed very robust dividends and tax distributions to our parents. From 2004 up through June 30 of 2008, Spectra and formerly Duke Energy received over $4 billion in cash distributions from DCP Midstream. Tax distributions are required to be paid to our parents based on our taxable income. And dividend distributions are discretionary and are approved by the DCP Midstream Board. Our 2008 plan included $1.2 billion in dividends and tax distributions. And you can see, we are almost there through the first half. So, we would anticipate coming in higher than that -- than plan due to the special dividend that we paid in April of this year, as well as just overall higher earnings. 10

11 So, let's move to the next slide and talk about hedging. As I mentioned, we do not hedge our commodity exposure on our G&P business at DCP Midstream. However, we do have an active hedging program for our MLP. The goal of our MLP DCP Partners hedging program is to protect distributable cash flow. In 2008, 86% of Partners' gross margin was fee based or hedged which provides strong cash flow protection for our MLP. Currently, Partners is approximately 75% hedged in the current year, and then less hedged in the outer years. We have experienced significant mark-to-market losses on Partners' hedges during the first half of the year due to the spike in the price of crude oil. However, as you all know, these are all non-cash charges and do not have an impact on our cash flow. And in fact -- well, with the drop in crude, we have seen some of that come back with the recent drop in crude in the third quarter. Also, in order to mitigate the impact of margin calls for our MLPs' hedges, we have put in place both letters of credit and DCP Midstream parental guarantees to significantly reduce or eliminate margining requirements for our MLP. In fact, right now where we sit today, we have no cash collateral outstanding for margin for our MLP. We do have some letters of credit, but we have no cash collateral outstanding. So really to sum it up, this slide is really a recap of what we've discussed today. Our key strengths can really be looked at from three perspectives -- operational, financial and sponsorship. As Tom indicated, operationally, we operate one of the largest portfolios of natural gas processing plants in the United States. Our significant market presence and asset base provide opportunities to be the best overall service provider in connecting new raw natural gas supplies and providing gathering and processing services to our customers. We have a strong reputation in the industry of being a reliable and efficient service provider. Financially, our interest coverage ratio is very strong at about 11 times and our debt to EBITDA is very healthy at 1.4 times. I think Tom mentioned we are relatively unlevered. We are positioned to opportunistically grow our business and withstand industry cycles. Our management is committed to maintaining our strong financial position and investment grade rating. And lastly, we have very strong sponsorship. Our parents, Spectra Energy and ConocoPhillips, are supportive of maintaining our industry leading position and growth. We have an experienced and successful management team with a proven track record of capitalizing on industry trends. And most importantly, we have the people to continue to make DCP Midstream the midstream industry leader. Thank you for your interest in DCP Midstream. Tom and I would be happy to take any questions that you have. And I'll turn it back to you, John, to facilitate our Q&A session. 11

12 QUESTION AND ANSWER Okay, thanks, Rose. For those in the room, we will have a Q&A session. I'd like to ask that if you have a question that you wait for the microphone, because as I mentioned earlier, this is being webcast and so the folks on the webcast need to be able to hear your question. If you'd be kind enough to state your name and your affiliation, that would be appreciated as well. But before we get to the questions here in the room, I'm going to ask the operator if you'll give instructions to the people on the phone, how they can ask a question. Operator Yes. (OPERATOR INSTRUCTIONS). Okay, thank you very much. While we're waiting to see who might have a question on the phone, let's go ahead and start in the room here and see who has a question here. Paul Fremont - Jefferies Can we just get a sense in terms of the total amount that you -- that you plan on processing in 2008? How is that number -- well, first of all, what would that number be? How is that number going to change based on the projects that the $1 billion of spending? And is that going to change sort of the relative percent of proceeds contracts versus some of the other contracts that you have? Okay. Let me start with -- we will probably, this year, average I'm thinking somewhere in the mid 6s (TBtu/d) in terms of what we gather and process. I think that number is actually on one of these slides here. We'll handle over 7 to 7.5 (TBtu) a day when we count in all the transportation, et cetera, but probably mid 6s (TBtu/d) or so in terms of gathering and processing. Obviously, we would expect that number to go up as we spend this $1 billion over the next three years. But how I would think about that investment, because it will be pretty highly variable in terms of dollars per M processed in terms of how that would all shake out, and that's why we provided a typical return on capital employed for you. In terms of how you might think about how that $1 billion would contribute to the business, I think we showed a target somewhere in the mid teens for what type of returns we would see there. 12

13 That answer your question? Unidentified Audience Member (inaudible-microphone inaccessible) Okay. In terms of the contracts, around our assets and around the existing footprint, typically what we will see is a continuation of POPs. As we move into some of the newer basins, like I pointed out in the Barnett, mostly fee based, the Piceance, mostly fee based. And we're fine with that. And actually quite comfortable with fee based on those areas. But around our existing assets, we're continuing to see POPs predominate. May I remind you to state your name and your affiliation before you ask your question, if you'd be kind enough to do that. Mark Caruso - Millenium Partners - Analyst Sure, Mark Caruso, Millenium, just two quick questions. One was you'd mentioned the Haynesville Connector project. Yes. Mark Caruso - Millenium Partners - Analyst You said the response was pretty good. So, I'm just trying to gauge is it -- were you just being conservative there because there seems to be a lot of drilling --? I've been around the pipeline business a long time. I tend to be conservative on these big projects. Certainly, the level of activity that's projected there from all of the forecasters and the producers is quite large and could accelerate quite quickly. And quite honestly, my belief is that there will be not just one pipeline project built out there. There may be a few or even more than that. So yes, we're cautious. There's a lot of work to do. And right now, we're focused on doing the citing right, getting a feel for the routing, where we want to put this project. How big should it ultimately be? And we're 13

14 spending a lot of time with the producers trying to entice them to sign long term contracts to support this project. But there is a lot of work to do on it. Mark Caruso - Millenium Partners - Analyst And are you seeing a situation where there's a lot of competition? You guys obviously -- when given your footprint to know [about gas]. But I mean, is there competition from producers themselves to do these things? Or do they see a situation where you --? Yes, to your point, I think we do like our footprint, Pelico is there. Although Pelico has to be substantially expanded, it tends to be a smaller pipeline. But we know the area, we're there. And so, that gives us, what believe, is some opportunity to even do some phasing of the project. I don't think the competition will come necessarily from producers' building pipelines. But there are several other pipelines that pass through that area who have, at this point, gone public with an interest in expanding their facilities or building a new greenfield project. Mark Caruso - Millenium Partners - Analyst And the second question is just -- you sounded like you guys will be ahead of plan on distributions given the special dividend and just normal course of business. But how should we think about use of cash or cash flow for the balance of the year? Is there a preference to do another special dividend? Or given the issues in the credit market, taking advantage of opportunities that you see to maybe consolidate some other MLPs who may have a tighter credit situation than you currently have? I would say that with regard to our use of cash, we're keeping -- I would say we're keeping our options open. Obviously, when we looked at the special dividend earlier this year, we saw the opportunity to create some real value for ConocoPhillips and Spectra. We're also seeing a number of projects emerge. And we tried to show you some of those today. And both Conoco and Spectra are very interested in us investing in this business and growing this business. And I think we all feel that now is a pretty good time to be looking around and seeing what assets may come on the market. What other opportunities do we want to be executing on? So I would say, we're at this point staying flexible and keeping all our options open, quite honestly. Leslie Rich - Columbia Management - Analyst Leslie Rich from Columbia Management. I want to ask a really basic question. How should I think about how sensitive your earnings stream is to sort of drilling activity? For example, if in the third quarter, fourth quarter, a bunch of these shale guys come out and 14

15 say, you know what, we can't get the money, we can't get the rigs, gas prices have come down, we're going to cut our CapEx. We're going to cut our production forecasts. Maybe that's on sort of projects to come, but in general as you look at your business mix, sort of how much of it is sensitive to drilling activities ramping up, ramping down versus more pipeline contracts that are just -- you sign long term capacity agreements and you're indifferent to near term volume adjustments? Well, we are pretty sensitive to the drill bit. And we spent a lot of time watching it and thinking about it. And you heard me comment today a couple of times that we've seen very, very strong drilling. Probably up about 20% this year in terms of well connects with over 2,000 connects on the system. And that's a very strong number. But we are dependent on people drilling. And we are dependent on gas moving through our facilities. Now, one thing that differs about us, and I'd ask you to think about as you think about our Company, is where we have quite a broad footprint. And so, we are spread out into a number of different basins. And so, yes, this is a great time and we're seeing a lot of volumes. But we've also seen times when prices have been lower. And we've done just fine. We also have a number of plays that are driven by oil that I tried to point out a couple of them to you today. And the Permian is primarily an oil play. And that's rich gas that has to be processed, but that'll be driven by oil pricing. We also, in the DJ Basin in Denver, that's primarily an oil play. And those will -- that drilling will continue under very soft gases prices. So, we have those kinds of areas around our system that will help mitigate any softness in gas price. And we -- I'm not at all concerned this year if prices soften a bit. In terms of shale plays, and I'll give you a couple of reasons for that, is one is that, I don't think the market and the producers will immediately react to softness in the price. I think it's going to take some time. You may see some of the more marginal production rigs get laid down there. But I don't think there'll be a wholesale stop in drilling unless you see some continued weakness in gas price for some prolonged period of time. In terms of the newer shale plays, those are areas that we're looking to for the future. They're not a big part of our overall portfolio now. Yes, we're interested in them in terms of growth, but they're really not providing a lot of earnings to us at this point. So, it's our extensive footprint right now that is really supporting the earnings that you're seeing this year. And the other thing I'd mention is this year's well delivers next year's volumes. And so, this record well connects we'll see are going to help us to continue to have strong volumes for next year. Scott Engstrom - Blenheim Investments Inc. - Analyst A couple of questions around costs. One you were -- Scott Engstrom from Blenheim Capital -- you were talking about some blocking and tackling opportunities. You mentioned efficiency and a couple of others. I was wondering if you could flesh that out a little bit, are you -- is that going from top quarter to top deciles, what's the financial implications of getting to some of those goals? 15

16 And then second question, I think when you were brought in to run, there was some questions about the cost structure, the organization in total. I'm wondering if you've gotten your arms around the cost structure, if there's improvements to be made and if you feel it's the right size, et cetera. To the first question, we have spent a fair amount of time looking at the assets and saying, okay, what is it that we can do to get better? We've had some outside folks look in and they pointed out some areas to us where they thought we could do better. And we launched those initiatives. And I mean, there's simple things around procurement, and we've seen significant cost avoidance, I would say, there. We also have, are trying to do this in a period of rapidly rising commodity prices for steel, polyethylene, pipe, fuel, just about everything we use. So, it's been more of an opportunity, I think, to mitigate some cost increases. We laid out our budget this year. I'm feeling good about where we are through year-to-date. But we are seeing pressure, no doubt about it. But we feel pretty good. And I think we'll come in, if not on budget, pretty close to it. Looking forward, one of the, a couple of things that are on my mind and I'm seeing quite clearly is we have to invest in the assets. I showed you some things about mechanical reliability. I showed you some things about fuel and Btu efficiency. They're not very glamorous, but if you can move the needle on those, our metrics run about, for each tenth of a point that we would see in Btu efficiency, that's $10 million of margin. That's worth paying attention to. Now, what you've got to figure out is how much does it cost to get you that tenth of a point? And so, we spend a lot of money on leak repair, we chase leaks, we're pretty sophisticated about it. We're doing things about reducing compressor fuel. Again, blocking and tackling, not very glamorous, but it's real money and it's real good returns on the amount you invest. So, those are some of things we're doing. We are going to look forward longer term and I think you'll see if we grow the business, obviously you'll see our total costs go up. But what we would look to do, is as we grow the business, try to keep some of the base activities around G&A consistent so that we can overall lower our cost per unit of throughput. Scott Engstrom - Blenheim Investments Inc. - Analyst And how many tenths of a point are there -- out there to be had? How many tenths of a point to be had are there? Well, several. It's a -- this mechanical reliability in Btu efficiency are things that you can't stop doing. If you stop, you'll back up. So, you try to -- by investing every year, you're trying to hold serve, and then you are trying to move the needle. And again, all tenths are not equal. We focus in the areas where the highest margins are. And those tend 16

17 to be the areas where the liquids are the highest in the gas stream. And so, that is where we're intending to spend our money. We're going to take a question from the phone now. Operator Okay. Sir, you have a question from the line Ross Payne with Wachovia. At this time, Ross, your line is open. Ross Payne - Wachovia Securities - Analyst Okay. Thank you. Sorry about that. Tom or Rose, given your balance sheet, any thoughts on being a consolidator either at the pipeline level, at the C-Corp or at your MLP? Second of all, any thoughts on any kind of drop, potential drop downs from COP or even Spectra? And last, any thoughts under better market conditions to ever IPO-ing DCP? Thanks. Well, let me start with the consolidation activity. Sure, I think I would say to you that we think that with where we're positioned and with our asset base, there should be some good opportunities going forward for some assets to come on the market. We believe they will. We believe we're in a very good position to consolidate some of those assets, extract some efficiencies. For us, gain some capacity in some areas maybe where we're pretty tight. So, I think those opportunities will come. I will tell you that if they do, we're interested. I think we can execute. I think we've got the dry powder to do so. And our parents are interested in us growing the business. So, we're very -- at this point, we're going to be opportunistic. I would tell you that prices have been -- prices on assets as you know have been fairly lathered. We'd like to see them come back a bit. And I believe they will. And then, I think things are in a position where they can be executed on. In terms of drop downs from COP and Spectra, I don't really have a good feel for that. I think, of course, Spectra has its own MLP and would probably be inclined to drop assets into their own MLP versus DPM. But I think the bigger question really is around drop downs in general from Midstream to Partners. That's still something we are committed to doing. We think it's a viable part of the -- of having an MLP that's sponsored by this company. And we think it is a real tool that we can use to create a competitive currency for DCP Midstream Partners. We also think it's something the market expects from us. On your third question about IPO-ing DCP, I don't think that's something that's on the table right now. It's something that was looked at years ago. We like the structure that we're in. We have ample opportunity to borrow funds when we need it. We're in a very strong position and right now, we just don't see any advantage in heading down that road. 17

18 I'll take another question from the room here. One here. Unidentified Audience Member Hello. I was just wondering if you could elaborate on slide 10, you mentioned that MLP model intensifies localized competition. Could you just elaborate a little bit more for me on that? Sorry, if I missed what that was. And then, just -- you mentioned the shifting contract mixes is causing margin pressures, what should we think about that going forward in terms of margin pressure in your business? And then just finally, Haynesville connector, I didn't see any actual amount of potential opportunity there. I realize that it may be early, but any sense as to sort of a range as to what the potential investment might be and when that would show up? You mentioned 2009, 2010, just any sense on that? Sure. On the first question around MLPs, I think as you look around you've seen quite a preponderance of MLPs entering the Midstream space. And my comment went to the fact that a number of these -- well, in certain areas, we've seen them more dominant than others. And they have created another level of competition and in some areas have, because of they're competing on a, which was at the time a tax advantaged capital structure, they in many cases were willing to accept margins lower than what we did. And they would set the bar lower in some of the competitive aspects. Now, that's cooled a bit, quite honestly, because of some of the challenges that they have had around raising capital in these, in this kind of environment. But that has created some competitive challenges that weren't there a few years ago for us. Not a big item, but a challenge. On the contract mix, what I'm referring to is that every year, we're in an industry where the volumes deplete. And as new volumes come on, they are re-signed and are generally re-signed to the market realities of the day, which is the pricing of the day. So, you may have had some contracts that were running under an old pricing structure which now will run under a renegotiated pricing structure. And that's part of the nature of our business is we're turning those contracts year-in and year-out. And I hope as you can see from our -- how the earnings have delivered over the last couple of years, it's something we've been able to manage. But it's a constant turnover of volumes for us. In terms of Haynesville, I think our estimate is going to move around depending on what size of pipe gets built, how long it gets built, and, but anywhere I think you could see anywhere from $800 million to $1 billion for that project. And at the very earliest, I would expect something in 2009, but more likely in

19 Okay. We have another question on the phone. Operator Your next question comes from the line of Faisel Khan with Citi. Faisel Khan - CitiGroup - Analyst Good afternoon, it's Faisel from Citi. Sorry, I apologize if I -- if you guys had talked about this already, the webcast is a little bit choppy, but could you talk a little about what you're seeing for some of the product prices on the Midstream side? And can you talk about -- a little bit about what you're seeing from the end user side in terms of what you're seeing from your chemical customers and your refiner customers? Just trying to get a sense of what you think the activity level is there and the demand for your -- for the NGLs. I'm going to ask Bill Waldheim to respond to that. Bill did you hear that okay? Bill Waldheim - DCP Midstream - Group Vice President, Commercial Yes. I'll try to answer the question. Generally speaking, we're seeing fairly good commodity prices as our products tend to follow crude oil as we talked. The chemical industry in general has been in relatively good shape because the lower dollar and the really -- the spread between gas and crude oil being as wide as it is, they've been having very good export markets. So, we continue to see the chemicals doing relatively well and they're running about as full as we've seen them. So, we have good prospects as you look into 2009 and that situation will probably continue. As far as our -- the product prices in general as you look forward, the -- a lot of concern around the price of ethane, and we do see many chemical companies that are naptha based type crackers that are in the process of doing their conversions to be able to crack light ends. And so, although the industry is producing more ethane, we do see the consumption of our products increasing in '09 and '10 as they do their conversions to their furnaces and begin to crack more ethane and propane. So generally speaking, we see prices that will remain robust, and follow the supply-demand balance which we think will be maintained as demand picks up on the chem size. Faisel Khan - CitiGroup - Analyst So fundamentally speaking, there's no -- from your guys perspective, there's no reason to think that these product prices will de-couple from crude? Bill Waldheim - DCP Midstream - Group Vice President, Commercial 19

20 Well, as far our prices and how they've reacted to the price of crude oil, as we see, the price of crude oil continued to move higher, the NGL barrel did fall to a lower relationship. Now, it did stabilize in that, I'll say, mid to lower 50% range. If you really start drilling into that though, a lot of that relationship is being driven by the ethane component of that NGL barrel. The propane and heaviers really do tend to follow crude oil more pronounced. So, the lower relationship is really driven by ethane. So, we do think that as these higher prices, you'll probably see the NGL barrel settle in to this 55- range, depending on from here where crude oil goes. But we think crude's going to hover in the $90 to $110, $120 range. Faisel Khan - CitiGroup - Analyst Okay. Great. Thanks for the time. Another question in the room. Trip Hodge - John Hancock - Analyst Hello, Trip Hodge from John Hancock. Two questions, one is maintenance compacts and second is how you think about leverage. Hook leverage is kind of high and I don't know how the agencies hit you on that. And where you might think that might be going given the distributions have been kind of high. And how do you think overall of your debt to EBITDA, how far you're willing to go, 5 times in your bank agreement, I certainly hope you don't want to go that far. And also in line with that, credit ratings kind of migrated towards the higher end of the BBB range, do you want to maintain that? Or are you willing to see that maybe go back to where it was in the mid-bbb range? Let me take on the maintenance capital one, and then Rose can answer the other eight. In terms of maintenance capital, we're pretty consistent. You're going to see us run about $100 million to $120 million a year and as I've looked back, that's probably the range that we've been running. It revolves around turnarounds, it revolves around a lot of different things, but if you were to target somewhere around $100 million to $120 million, I think that you'd have a good number. The other thing that, as you think about maintenance capital in this business, you start to think about well connects. And we -- those are there every year and you've got to do them. So, it's almost like maintenance capital. And that generally runs about $100 million a year. This year, we bumped it. And pretty significantly because of all the activity that we've seen. So, those are the -- as you think about kind of the spends for us, think about maintenance at $100 million to $120 million, well connects at around $100 million, could run more, could run less. 20