DCP Midstream LP : Second Quarter 2022 Earnings Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

DCP.N - Q2 2022 DCP Midstream LP Earnings Call

EVENT DATE/TIME: AUGUST 03, 2022 / 4:00PM GMT

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2022 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

AUGUST 03, 2022 / 4:00PM, DCP.N - Q2 2022 DCP Midstream LP Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Michael Fullman DCP Midstream, LP - Director, Investor Relations

Sean P. O'Brien DCP Midstream, LP - Group VP & CFO of DCP Midstream GP, LLC

Wouter T. van Kempen DCP Midstream, LP - Chairman, President & CEO of DCP Midstream GP, LLC

C O N F E R E N C E C A L L P A R T I C I P A N T S

Gabriel Philip Moreen Mizuho Securities USA LLC, Research Division - MD

James Eugene Carreker U.S. Capital Advisors LLC, Research Division - Executive Director

Marc Joseph Solecitto Barclays Bank PLC, Research Division - Research Analyst

Michael Jacob Blum Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

P R E S E N T A T I O N

Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to DCP Midstream?s Second Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. (Operator Instructions.] I would now like to hand the conference over to your speaker host for today, Mike Fullman, Director of Investor Relations.

Michael Fullman - DCP Midstream, LP - Director, Investor Relations

Thank you, Livia, and welcome, everyone, to the DCP Midstream Second Quarter 2022 Earnings Call. Today's call is being webcast, and I encourage those listening on the phone to view the supporting slides, which are available on our website at 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 risk factors, please refer to the partnership's latest SEC filings. We will also use various non-GAAP financial measures, which are reconciled to the most comparable GAAP financial measure in schedules in the appendix section of the slide. Wouter van Kapan, CEO and Sean O'Brien, CFO, will be our speakers today. And after their remarks, we'll take your questions.

With that, I'll turn the call over to Wouter.

Wouter T. van Kempen - DCP Midstream, LP - Chairman, President & CEO of DCP Midstream GP, LLC

Thank you, Mike, and we appreciate you all joining us. On today's call, we'll look at our Q2 financial performance and highlight the benefits and value being created through the hard work and execution of the DCP team. A little over two years ago, at the start of the COVID-19 pandemic, DCP faced a rapidly changing external environment with unprecedented demand destruction and extreme commodity pricing volatility. In response, we focused our efforts on strengthening our balance sheet and prioritizing debt reduction. We set out to build a business that delivers reliable earnings during a low cycle and that excels and outperforms through the high cycles. That said, I'm proud to announce that we delivered another record quarter for adjusted EBITDA, DCF and excess free cash flow. For the quarter, we realized adjusted EBITDA of $477 million and DCF of $369 million, and our excess free cash flow, which we define as free cash flow after paying our distributions and funding our gross capital program was $254 million.

This quarter's result, coupled with our strong Q1 performance, have generated a record start to the year as our year-to-date adjusted EBITDA is over $900 million. Our DCF is over $700 million, and our excess free cash flow is already at the midpoint of our full year guidance range, only six

2

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2022 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

AUGUST 03, 2022 / 4:00PM, DCP.N - Q2 2022 DCP Midstream LP Earnings Call

months into the year. This performance has enabled us to reduce our absolute debt by over $300 million, delevering at a rapid pace, going from 4.2x to 2.9x over the last 12 months. And our efforts have resulted in upgrades from Fitch to investment grade and from S&P to positive outlook.

Our investment-grade balance sheet and the earnings power of the DCP portfolio have created financial flexibility and allowed us to expand our Permian G&P business with the James Lake acquisition, announced a 10% distribution increase to return incremental capital to our unitholders. The DCP team has accomplished a lot over the last six months as our performance has surpassed our original expectations, and we have great momentum going into the second half of the year. This strong start and our outlook for the rest of 2022 will result in us significantly exceeding the high end of our full year guidance for adjusted EBITDA and DCF.

Before we dive into detailed financial results and review our second half outlook, I'd like to take some time to discuss our third annual sustainability report and the progress that we've made on our ESG efforts. On Monday, we released our annual sustainability report titled fundamentally sustainable. And on Slide 4, you'll see some of the highlights from that report. As a reminder, at this time last year, we announced a number of environmental and social goals aimed at proactively meeting the needs of our employees, our customers, our investors and our communities. We're proud to announce significant progress towards these goals with an 8% reduction in Scope 1 and Scope 2 emissions in 2021, bringing us to a total 23% reduction in 2018.

Additionally, on the environmental front, we've accomplished an 80% reduction in volume of hydrocarbon spills and we continue to be recognized as a leader among our peers with our sixth Environmental Excellence Award from the GPA Midstream Association. The report also details our progress on inclusion and diversity outcomes, including improvements in our employee satisfaction and employee belonging scores, which increased in the last year by four points and six points, respectively. Our goal here is to maintain scores above the industry benchmark. And not only have we continued to meet this goal, but we've seen significant improvement, reporting an employee satisfaction score of 80%; 7% above benchmark and an employee belonging score of 81%; 8% above the industry benchmark. These increases are especially impressive as they were achieved while facing headwinds such as COVID and the great resignation.

And while we're proud of the work being done internally at DCP, we're also committed to sustainability, transparency and standardization. This year's report includes initial alignment with the recommendations of the task force on climate-related financial disclosures, or TCFD. It provides enhanced description of some internal management practices around sustainability and climate-related risks and opportunities. And this alignment drives transparency for our investors and supports long-term accountability. I'm proud that our team continues to make progress on those three strategic horizons of our comprehensive energy transition plan. While we actively clean the core, we also have resources dedicated to advancing adjacent to the core initiatives like carbon capture and electrification. And we're looking beyond the core to ensure we're on track in meeting our long-term ESG goals. I encourage you to access the full report on our website, and I look forward to a continued conversation.

And with that, I'll turn it over to Sean to give us further insight into our financial results.

Sean P. O'Brien - DCP Midstream, LP - Group VP & CFO of DCP Midstream GP, LLC

Thanks, Wouter. On Slide 5, I'll walk you through the key drivers that led to our strong second quarter performance, with DCF up nearly 10% versus last year and 64% versus Q2 2021 and adjusted EBITDA up 9% versus last quarter and 43% versus Q2 2021. Our second quarter earnings were driven by the strength of our G&P business, which significantly outperformed Q1s margin by $93 million. This increase was driven by excellent operating performance as our team utilized our integrated collaboration center to run assets extremely well and maximize the value of every molecule entering the system. Our balanced fee and hedge position allowed us to leverage the full earnings potential of our G&P assets in this strong commodity environment.

For the quarter, we also saw increased volumes in all regions as we recovered from the weather in Q1, it saw an uptick in activity throughout the portfolio. In the DJ Basin, we realized modest growth of 2%, which provided incremental supply to our downstream assets. In the Mid-Continent, we've been able to successfully offset base volume declines and realized 5% volume growth versus the first quarter. This region is benefiting from smaller independent producers ramping up activity and reworking existing legacy wells. In the South, we saw a 26% uptick as we captured increasing lean gas from the Haynesville and Eagle Ford and saw growth in the Permian that was driven by accelerated activity from key Delaware Basin customers. Our increased G&P volumes, along with increased third-party ethane recovery and growth in the Permian drove higher volumes on

3

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2022 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

AUGUST 03, 2022 / 4:00PM, DCP.N - Q2 2022 DCP Midstream LP Earnings Call

Southern Hills and Sand Hills, which partially offset the decline in earnings from our gas storage business. During the quarter, as previously guided, we did realize an increase in cost and sustaining capital compared to our first quarter results. However, both were in line with expectations.

In addition, we were able to continue our absolute debt reduction, eliminating over $200 million during the quarter and over $300 million year-to-date. This left us exiting the quarter with leverage at 2.9x, nearly a half turn improvement from the 3.3x we reported exiting Q1. As a result, our balance sheet was further reinforced by an investment-grade rating from Fitch and S&P revised our outlook to positive.

On Slide 6, looking ahead to the second half, we're forecasting continued volume growth in the Permian and DJ keeping us on track to meet our growth targets for the year. We've seen a recent uptick in permitting approvals in the DJ, which will benefit us in the second half of the year and provide a good line of sight to 2023 volumes. And we are confident we will see improved asset performance and volume growth in our West Texas business as we expand our Midland Basin gathering system and add the recently closed James Lake acquisition to the portfolio. On the pipelines, our Southern Hills outlook remains strong, driven by our DJ and MidCon G&P business. And on Sand Hills, we're optimistic that we will continue to see some level of ethane recovery from third-party customers and are positioned to participate in overall growth in the Permian. During the second half, cost and capital spend will increase as we ramp up planned maintenance and investments in our assets. However, our first half results have us on track to meet our full year commitments as we work to manage through the inflationary environment and supply chain constraints that we will expect to persist through the second half of this year and into 2023.

With our record first half and our positive outlook for the second half, we are on track to deliver earnings that will significantly exceed the high end of our adjusted EBITDA and DCF guidance ranges. Given the extreme volatility we've seen across all three commodities, the pricing outlook for the second half of the year continues to shift daily. Year-to-date, we've already banked pricing uplift of $150 million. And using the midpoint of our guidance and the current forward curve, we would expect to have full year upside to adjusted EBITDA of about $300 million. To help you with our outlook during this period of volatility for every 10% move up or down in the commodity, there would be a $50 million impact over the second half of the year. Our business is performing well, and we're controlling what we can control, which allows us to fully maximize the earnings power of the DCP portfolio during this high cycle.

Now I'll pass it back to Wouter for an update on our capital allocation priorities.

Wouter T. van Kempen - DCP Midstream, LP - Chairman, President & CEO of DCP Midstream GP, LLC

Thanks, Sean. As we exit Q2, our performance has resulted in the generation of over $0.5 billion of excess free cash flow. And I'm proud to say DCP is once again an investment-grade company. We made the commitment to strengthen our balance sheet and our hard work and focus have paid off. With leverage at 2.9x, which is well below our 2022 annual guidance, we've executed on several items within our capital allocation plan. First, we reduced absolute debt by over $300 million. Second, we announced a distribution increase of 10% to immediately return incremental cash to investors. And lastly, we have committed additional capital to expand our Permian Basin G&P business via the James Lake acquisition.

Going forward, our expectation is to continue to pay down debt and use the strong commodity environment to fortify the balance sheet, but we're also in a position to shift priorities and commit incremental capital to strategically grow our business or optimize our capital structure through targeted retirements or repurchases. When we talk about growing and investing in our business, the James Lake acquisition is a great example of the type of opportunity that fits within DCP's strategy, which brings me to Slide 8. Previously, I outlined our vision to create a wellhead-to-water gas and NGL network and a key component to achieving that is aggregating incremental wellhead and NGL supply. So, we were excited to announce our acquisition of the James Lake system. The deal just closed on August 1 for $160 million at an attractive 5.5x 2023 EBITDA multiple. The purchase includes 120 million a day processing facility along with 230 miles of gathering pipeline and approximately 250,000 dedicated acres from a diverse customer base that includes investment-grade public companies and pure-play Permian operators. The geography of these assets is complementary to our existing footprint with connectivity to our Sand Hills NGL pipeline and the new plant sitting only three miles from our Goldsmith facility.

This acquisition also enhances our gathering footprint by adding newer, large diameter pipeline that provides strategic reach into the Southern Delaware Basin and greater connectivity in the Midland Basin. In the near term, we've secured incremental NGL supply and added capacity in the Permian that will improve reliability while benefiting our customers and positioning DCP for growth. And in the long term, we will leverage our DCP 2.0 operating model to drive additional efficiencies and provide capital deployment optionality. All of this sets up well for us to realize

4

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2022 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

AUGUST 03, 2022 / 4:00PM, DCP.N - Q2 2022 DCP Midstream LP Earnings Call

operational and commercial synergies, which we expect to improve earnings and ultimately drive down that 5.5x multiple. Overall, we're excited to have expanded our portfolio through the strategic growth acquisition. More to come. But for now, we'd like to welcome the James Lake team to DCP and look forward to successful operations together.

Moving to Slide 9. Let me review some key takeaways. It's been an impressive first half, and I am very proud of what the team has accomplished. Creating a strong balance sheet has been a priority for DCP, and we now have one. We've accomplished this by paying down over $300 million in absolute debt so far this year, which has us exiting Q2 at 2.9x leverage. With this improved financial strength, we've been able to further execute on our capital allocation plan, announcing a 10% distribution raise and investing in growing our Permian footprint through the acquisition of the James Lake system. In the second half, we'll manage throw continued inflationary pressures, supply chain constraints and commodity volatility. But the outlook for the company remains very, very strong with favorable supply forecasts from our customers and commodity pricing benefiting us through the second half of the year. We're confident in our ability to close the year strong and deliver record results that will significantly exceed the high end of our adjusted EBITDA and DCF guidance ranges.

And with that, I look forward to taking your questions. Livia?

Q U E S T I O N S A N D A N S W E R S

Operator

Thank you. (Operator Instructions.] And our first question coming from the line of Michael Blum with Wells Fargo.

Michael Jacob Blum - Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

I wanted to maybe just talk a little bit about M&A. So, you've done this James Lake acquisition, but just wanted to get your thoughts on do you have an appetite for continued either bolt-ons or I could look at the company now and say, arguably never been in a better position, better shape. The industry is ripe for consolidation. Is there any possibility of doing something more transformative right now?

Wouter T. van Kempen - DCP Midstream, LP - Chairman, President & CEO of DCP Midstream GP, LLC

Yes, Michael, this is Wouter. Thanks for the comment about the company being in probably a great position, never better. I do agree that the outlook is really good, like the balance sheet looks good. And I think the company -- all the people within DCP did a tremendous job over the last couple of years to really set up the company well for an environment like this.

I think in general, I'm like, M&A activity is clearly ramping up pretty significantly. If you just look to the last 18 months alone, we've seen more deal activity than the four years prior to that combined. I think multiples are getting in a little bit better place. And like you're seeing 6x to 8x. For us, for James Lake, 5.5x to 8x kind of multiple. So, I think that will be -- definitely makes things a little bit more interesting. I think the privates arethe PEs are exiting. You have some motivated sellers, you've got people with better balance sheets like us. So, I think in general, what we would say is, yes, you know, if there's an opportunity for us to do something that makes a lot of sense, either via a smaller transaction or something that may be a little bit larger. We're definitely looking at it. We think there is some opportunity to do things in this environment. At the same time, we're going to be super, super disciplined. We have, I think, you know from us that we're fairly disciplined when it comes to new build, when it comes to M&A. And from that point of view, we're going to stay very disciplined. But we'll take a look at anything that comes by and if it makes sense, we may or may not take a run at it.

Michael Jacob Blum - Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

Great. Second question I had was maybe this is a technical question, but just curious why you're not just raising the guidance outright. Is there something holding you back? Are you less confident in the outlook? I'm just trying to understand that.

5

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2022 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.