Earnings Transcript for DCP - Q2 Fiscal Year 2021

Operator: Good day, and thank you for standing by. Welcome to the DCP Midstream Second Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mike Fullman, Director of Investor Relations. Please go ahead.

Mike Fullman: Thank you, Shannon. Good morning, and welcome to the DCP Midstream second quarter 2021 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 Web site 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 nearest GAAP financial measures in those schedules in the Appendix section of the slides. Wouter van Kempen, 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 van Kempen: Thank you, Mike, and good morning, everyone. We appreciate you joining us today and I hope you all safe and well. On today's call, we will discuss our second quarter and first results for 2021 and our outlook for the remainder of this year. Before getting to that, I would like to say thank you to team DCP for delivering another strong quarter of results. Compared to the last 15 months, the second quarter was relatively quiet. Instead of managing through unprecedented events and responding to historic volatility, we focused 100% of our time and efforts on executing our strategy, providing safe and reliable operations for our customers, accelerating progress on ESG and sustainability and investing in our employees and our culture. Our second quarter results in highlights demonstrate strength of our diversified portfolio, the transformation we've undertaken over the last five plus years and the earnings power of the DCP business model, which was recently recognized by Moody's with a full turn upgrade. Fourth quarter, we generated $333 million of adjusted EBITDA and $225 million of DCF, representing 21% and 29% increases versus Q1 as volume strengthened across the portfolio. Within the quarter, we generated record $132 million of excess free cash flow, which was the fifth consecutive quarter generating positive excess free cash flow, which we define as cash flow after paying our distributions and funding our capital programs. This strong quarter and fast start to the year coupled with favorable commodity environment and producer activity has us confident that we will meet the upper ends of our financial guidance. The DCP business model strategy and track record of execution has the partnership well positioned as we look towards the second half of the year. As we aim to close the year with a strong second half and build momentum for 2022, we're also taking steps to position DCP for the long term future as we accelerate our ESG and sustainability efforts, which brings me to our next slide. On Monday, we published our second annual sustainability report, resiliency and evolution, which highlights of sustainability performance from the 2020 calendar year, announces forward looking goals from greenhouse gas emissions reductions and inclusion and diversity, and outlines our strategies within a variety of ESG related efforts. Importantly, we substantially increased our disclosures by aligning SASB, the Sustainability Accounting Standards Board, the Energy Infrastructure Council, ERC and the GPA Midstream Association ESG Reporting Template, the latter of which we helped to create as a participant in the joint ESG Working Group. Before I review the highlights of our report, I want to set some context. United Nations expects the global population of 7.7 billion people to increase to almost 10 billion by 2050, with the potential to peak at 11 billion by the century’s end. As one of the largest natural gas processors and natural gas liquids producers in the United States, DCP plays a critical role in meeting the rapidly increasing energy demands of a growing global society that is constantly striving for enhanced living standards. From creating electricity, fuels and heat sources to providing feedstock for countless consumer and industrial products, the natural gas and NGLs that DCP processes and transports are a fundamental pillar to improving quality of life, both here in the United States and abroad. And this is why our company purpose is building connections to enable better lives. We know that hydrocarbons continue to fuel our global society with increased long-term demand for natural gas for decades to come. And we also know that we have a duty to ensure that our role in the energy value chain is as clean, as responsible and as sustainable as possible. We've established a sustainability council and energy transition team, focused on building and executing long-term strategies to ensure our company sustainably enhances values for our stakeholders, and as we are a proactive participant in the energy transition. Our council has established concrete three year strategies to drive our sustainability performance and in our newly published report, we outline how well the team executed last year. At DCP, 2020 was not defined by the challenges we faced but by the achievements we celebrate, including our financial and strategic execution, as well as our ESG performance. Several highlights of our team's hard work during our company's most trying times include a 46% decrease in recordable injuries since 2016, with an industry leading TRI of 0.44 in 2020. 16% reduction in Scope 1 and Scope 2 greenhouse gas emissions and 23% reduction in methane emissions since 2018. We established a company wide inclusion and diversity committee and we increased diversity on our Board of Directors. We achieved an employee engagement survey score of 76%, which was above the industry and represents 3 percentage point increase since 2018. And as a company, we donated $1 million to our community partners, including 325,000 to local food banks during COVID-19 crisis. We're proud of the progress that we've made. We're excited about setting new forward looking targets, which brings me to Slide 5. Looking forward, we must continue to evolve and proactively meet the needs of our employees, our customers, our investors and communities. There is a remarkable opportunity for our company to thrive ensuring sustainability of DCP for the long-term. We've been strong midstream company for over nine years. And by successfully enhancing our ESG outcomes, we ensure we can operate as a leading midstream business for decades more to come. In our reports, you'll find that among many targets and aspirations for improvements, we've highlighted several new forward-looking goals. We have two goals for emission reductions, including that by 2030, we will reduce our total Scope 1 and Scope 2 greenhouse gas emissions by 30% from 2018 baseline and that by 2060, we will achieve net zero greenhouse gas emissions. We plan to achieve those targets through three strategic horizons focused on clean the core, adjacent to the core and beyond the core. Clean core means continuing to improve our emissions profile through increased efficiency and modernization of existing operations. And we know that we're going to spend most of our efforts here over the next decade. Adjacent sort of core focuses on expanding our business portfolio where DCP's existing intellectual social capital is relevant to compete and complimentary business lines that improve our outcomes and provide solid returns. And this includes -- that include carbon capture and sequestration and other emerging technologies. And beyond the core is a strategy to ensure that DCP is positioned well for the rapidly changing energy ecosystem and tomorrow's energy solutions. In addition to our emissions reduction targets, we've also established formal inclusion and diversity goals. And these includes by 2028 and 2031 ensuring our workforce, our leadership and our success pipeline represents the gender and racial demographics of the local communities in which we operate. Secondly, we continue to invest in our people and are committed to maintaining at least satisfaction and belonging scores above the industry benchmark over the next five years. And finally on an annual basis, ensuring that representation of veterans in our workforce aligns with national demographics. When aligned with our focus and safety, reliability, transformation, efficiency and culture, these goals are above continuing to do what is right while strengthening our company. And we're proud to back our words up with action. On Monday, we also announced renewal for our $350 million accounts receivable securitization facility with the addition of ESG linked KPIs. This is a first of its kind agreement within the entire energy industry as we have leveraged our annual pricing against our safety performance relevant to our peers and year-over-year reductions in our greenhouse gas emissions intensity rates. Our goal is to demonstrate accountability to improving our sustainability performance. As always, we welcome your feedback on our reports, our targets and our strategy looking forward. And with that, I'll turn things over to Sean to go through the second quarter financial results.

Sean O'Brien: Thanks Wouter and good morning. On Slide 6, I’ll hit the key drivers to our strong second quarter performance. We generated $333 million of adjusted EBITDA and $225 million of DCF, which were significant improvements from the first quarter. As the industry rebounded from the impact of winter storm Uri in Q1, volumes across our G&P business continued to strengthen through the quarter, which allowed us to maximize the impact of the favorable commodity environment. Sand Hills and Southern Hills volumes were up 26% and 10% versus Q1 as the pipelines benefited from growing G&P volumes and increased third party ethane recovery early in the quarter. As expected, we realized higher costs and sustaining capital as deferred maintenance work from Q1 took place in the second quarter. While there was an increase in spend quarter-over-quarter, we will continue to aggressively manage our costs and capital as we finish the year. We're committed to maintaining the savings we realized in 2020, while managing the impact of inflationary pressures on the business. We saw a slight increase in leverage for the quarter moving from 401 to 402 times due to the timing of working capital, which was primarily a result of collateral posted associated with our 2021 and 2022 hedging programs. We fully expect this to normalize over the next two quarters and position us to finish the year in line with our 4.0 times guidance. Now moving to Slide 7, I'd like to provide an update on our second half outward. We continue to see favorable indicators as we move into the second half of the year. G&P volumes were up 6% quarter-over-quarter and trending favorable to Q2 2020 after normalizing to account for the large contract expiration in the Eagle Ford that took effect on January 1st. We're seeing producers accelerate drilling plans, resulting in improved volume outlooks specifically in the DJ and Permian as we close the year. Within the logistics business, we continue to forecast Sand and Southern Hills and high utilization rates, as Southern Hills continues to benefit from the steady supply of volumes from our Midcon business, as well as the growth we're seeing coming out of the DJ basin. On Sand Hills, we are currently seeing third party ethane rejection as natural gas prices have increased over the last two months. In this environment, DCP's commercial team has done an outstanding job working with our customers to incentivize some level of ethane recovery to generate incremental value for DCP and our customers. As for the rest of the year, we do anticipate volumes on Sand Hills continuing to improve and there remains potential upside with increased ethane recovery over the last five months of the year. The commodity outlook has stabilized and the forward curve remains strong with all three commodities trading at higher prices than we realized in the first half of the year. This will provide a nice tailwind given our unhedged equity positions. And while we'll see increased costs and sustaining capital relatively the first half of the year, we are tracking in line with our full year expectations. With favorable volume trends we're seeing and assuming the forward curve remains strong, we are well positioned to meet the upper end of our financial guidance. And with that, I'll turn it back over to Wouter.

Wouter van Kempen: Thanks Sean. Let's close this off on Slide 8. The DCP team continues to deliver strong results and has us well positioned to meet our 2021 commitments. Our diversified business model and execution of our long term strategy continue to deliver value for unit holders. Over the last five plus years, we’ve build our stable fee based logistics business, generating almost 60% of our earnings. We permanently removed $160 million of costs from the company. We executed capital efficient supply [loan] capacity short strategy, and all of this while retaining favorable commodity upside. This transformation and execution sets us well to generate significant cash flow during these favorable commodity environments. But in the first six months of the year, we generated nearly the same amount of excess free cash flow as we generated in all of 2020. Our capital allocation priorities remain unchanged as we're committed to reducing our absolute debt and strengthening our balance sheet. Looking forward, we're seeing favorable imitators which has us optimistic to deliver towards the high end of our 2021 financial guidance. We're very well positioned as we enter in the second half of the year and look to build momentum heading into 2022 as we transition to returning additional value to unitholders. We'll take the next step in the DCP journey as we accelerate and continue to derive step change improvement on the ESG and sustainability front. We’ve set aggressive targets that I'm confident that the DCP team will deliver on. We're incredibly proud of the accomplishments of our team today and we're excited to continue our sustainability journey for decades to come. With that, I look forward to taking your questions. And Shannon, please kick us off.

Operator: Thank you [Operator Instructions]. Our first question comes from Jeremy Tonet with JP Morgan.

Jeremy Tonet: For the guidance out there, I just want to confirm the commodity price deck being used there. Is that kind of unchanged from what you said last quarter? And so if you kind of mark to the strip, you might get to something a bit higher. And just want to see exactly what's baked in for ethane expectations there, recovery pricing in Southern Hill volumes picking up there and helping as well?

Wouter van Kempen: So I think you're thinking about it right, Jeremy. what we've done for the second half of the year, and look I'm excited that we went to the high end of the guidance. Obviously, that includes, if you think about Q1, that includes more than covering, well, more than covering the Uri impacts. But specifically to the price deck, if you take the current strip, you're going to get some more upside than probably what we have baked in. We sort of have a view where it's in line with what we've seen in the first half of the year and slightly better than that. But current spot, if that holds for the remainder of the year you definitely have some upside to the guidance that we gave. But definitely we’ve baked in some favorable price uplift in the second half of the year, it could be better. On the ethane recovery rejection side of the fence, I'll remind you we came into the year assuming full recovery, obviously, that it's been sporadic too, one we didn't see a lot. We saw a little bit in Q2. And I want to be clear, this is third-party. Because of our value chain, we've been in recovery the whole time. So the barrels of weed control, we've been in full recovery. But on third-party, you saw a little bit. We did some -- we incentivize some recovery early in the quarter, people went back into projection mode. I think that when I talked about it, gas has just been screaming. So that kind of pushes people and their economics back into probably rejection. That also by the way, if we see recovery click back on the remainder of the year, all boats rise, that would be upside for us. We were assuming rejection, third-party rejection for the remainder of the year. So couple good things that could go our way as spot prices continue to hold and we see something a little stronger than our outlook, awesome. And then obviously as we move into recovery that's upside above and beyond what we've thought -- of what we baked in.

Jeremy Tonet: So spot and ethane recovery upside to the top in the guide as you laid out there. So that's great to hear. Maybe just kind of pivoting towards producer conversations at this point, commodity prices moving up here, producers have really been kind of disciplined on production growth, but the privates are a bit more active. And then it seems even with the publics, I guess, if the leveraging is going down maybe there's more kind of activity picking up there, especially as we go into '22. Just wondering if you could peel the onion a little bit more with your producer conversations and how you see things trending across your footprint there?

Sean O'Brien: With some of the big producers, you're spot on. So there's obviously a lot of optimism, they like the environment that they're seeing, but the discipline continues. I actually think that's a pretty good thing. Because we are seeing some rigs, some rig increases, we're seeing some activity. Obviously, the growth that we did assume in areas like the DJ and the Permian are not only happening this year the way we thought and a lot of cases they've been accelerated a little. So that's good and I think that bodes well for the second half of the year. Wouter can talk a little bit. But we are seeing more around the small guys not as big of a driver, but you definitely are seeing more activity there. As you think about '22 and that sort of depicts we were trying to set, we feel like we're going to exit the year pretty strong based on what we're seeing from our producers, what we're hearing. And I think that discipline will continue but it will drive I think a nice even keel growth outlook and volume outlook for '22, and I think that's really good for our industry at this moment. So definitely significantly better than what we would have thought six or eight months ago.

Jeremy Tonet: And just one last quick one, if I could. When it relates to CC US and given us a lot of our pending legislative efforts out there that could change the picture, but just wondering specifically as it relates to DCP. If you could build a bit more about what specific initiatives could be pursued if the right policy support comes through there?

Wouter van Kempen: So maybe I'll take that one. So we think about CC US that really is probably, I spoke about clean the core. So those are the 10 year projects that we have where we already are kind of doing things around modernizing our footprint, asset reliability and then you got the adjacent to the core CC US or for us probably more CCS is really going to be around adjacent to the core. We already doing a significant amount of carbon capture and sequestration in our Southeast Mexico business today. And we have additional opportunities to do that in New Mexico and Colorado, in Michigan. If you think about it, gas processing plants are fairly significant aggregation points for carbon. And if we can find a way where both from a regulatory regime at the federal level, I think 45Qs, as well as kind of a speed to the ball and state levels and I’m then thinking about, hey, how do you get Class 6 wells permitted in a reasonably sized time period. You can build a good returning business there where we would earn above our weighted average cost of capital and take a very, very significant amount of carbon and Scope 1 emissions out of your footprint. So it's something that the team is looking at as quite diligently. There's a lot of opportunity. We're already doing it. So it's something that we're familiar with. We do need to have the 45Qs to be going up a little bit from where they're sitting today. We do expect that there's bipartisan support there and that will happen. And then you're kind of thinking about how you can get some permitting point-of-view, how can you -- can you get things in place in an expedient manner?

Jeremy Tonet: Hopefully, the Railroad Commission gets a primacy there and that would help with the Classic 6 wells a lot. So thank you for all your thoughts there. That was very helpful.

Operator: Our next question comes from Shneur Gershuni with UBS.

Shneur Gershuni: I just wanted to clarify one of your responses to the prior questions on guidance. You had sort of said there's extra [cushion] with respect to commodity pricing. But you do also have some extra cushion with respect to volumes just given how strong the volumes were this quarter as well too?

Wouter van Kempen: I would tell you, Shneur where I see the potential cushion and I was alluding to it is on the pipelines potentially and it's -- we end up going into full recovery that that would bode very well for Sand Hills. I mean, we're seeing good -- the capacity utilization on both pipes, we're very happy with, but there is some upside there. It's still -- look, volumes have come back strong. I think we have some growth, per my written remarks, the remainder of the year. Is there some upside? I think we've baked in mostly what the big guys have told us, but there's always potential that things could come in a little bit stronger. But I keep an eye. The bigger thing I think is recovery. And then of course, if commodity stays screaming like the spots that would be upside for the company as well.

Shneur Gershuni: Let me just pivot to the questions that I had. Just curious if you do end up in kind of in excess of guide type of mode with excess cash generation. You've sort of labeled your priorities as reducing debt. You talked about the Moody's upgrades and so forth, or the outlook upgrades and so forth in that those remain a priority. Just kind of curious though is like kind of you've been putting off maturities as they come up. But when I sort of look at your capital structure right now most of your debt is trading above par, obviously, that's good as to your performance. But kind of curious if you'd be looking at other parts of your capital structure. For example, the junior sub notes which due traded at discount and you actually have pretty high coupons, but that becomes kind of focus kind of in between maturity expirations?

Wouter van Kempen: Shneur, I'll start it and then Sean, you can jump in as well. I think, in general, you're [spot on]. I mean, we believe that this is the perfect time to set the company up well for the long term. And that means getting to a very strong balance sheet. So we are very committed to for our leverage by the end of this year. And I think if things stay as is that's kind of what Sean was talking to, if you have commodity prices like they are today with our continued kind of good management around reliability, how we manage cost, capital, things like that, you get to an excess free cash flow profile where we should be somewhere in the 3.5 range in 2022. And that provides you a massive amount of flexibility. 3.5 is kind of the key number for us. It's really where we want to be. And after that you're absolutely right, there's a tremendous amount of flexibility. And that flexibility can be anywhere from, hey, are we going to raise the distribution, going to get more back to our unitholders, that way is there a way to buy back units, is there something to do around the preferreds that you're talking about, some of ourselves are trading at a premium as well. As you know, some of them are a little bit below but we also get significant equity credit there, which we have to balance those two things together. But I think the key takeaway here in short run continuing to get the balance sheet right, this is the perfect moment. We will get this company to a very, very strong balance sheet with investment grade type of metrics. And after that and if commodity stays like where we are today, you've got massive, massive flexibility in 2022 and beyond and that's pretty exciting.

Shneur Gershuni: And maybe just pivot, I was looking kind of in your panic is around the hedging that's been in place. Looks like you've added some 22 hedges right now and I think you're now at about 41% hedge versus 15% last quarter. Is that kind of enough, is that kind of where you kind of need to be at this point right now? And also as you've been layering on the hedges, especially on the gas side, just given the basis issue from last quarter with just on Uri, have you sort of adjusted the way that you're putting your hedges on in and so forth?

Sean O'Brien: So two things on that. First question, I couldn't have said it better. I mean, I think a couple things -- this price run up has given us the ability, Shneur, so those 22 hedges, when you really think about them are at pretty significantly higher prices than '21. So if you're just going to mark hedge to hedge, there's a pretty good cash flow pick up there going to the pricing in the '22. I do think you're thinking -- everything we've said thus far plus is a little more bullish around outlooks for next year. So I do think we will not go in and be as hedged as we were in 2021. I mean, we're about consistency and cash flows, taking advantages and locking in at good rates. But I do think we feel really good about where we're at in '22. So we probably will feel like that we probably are where we need to be at the moment. So yes to that question. And in terms of the Uri, the equity hedges will be did not pose any problem. They have longer duration. Obviously, they're not impacted by the volatility like Uri was all about volatility around spot prices and gas daily prices in like a five day period or you know. So the longer term hedges always performed well, that was more around selling the product that you had in those days. And obviously the product wasn't there. And we have -- by the way to answer that question, we have added -- we have taken some different approaches that will safeguard the company so that we will have -- we’ll be in a better position if you were to see another type trend issue like that in the winter.

Operator: Our next question comes from Michael Blum with Wells Fargo.

Michael Blum: Just two quick ones for me. One, I wonder if you can just give us your outlook on the Midcontinent specifically, what you're seeing there from producer activity level? And also, I guess, related, what's your view of how Southern Hills volumes sort of trend here for the rest of the year and into next?

Sean O'Brien: Michael, so far, Southern Hills showed a bunch of impact. There are positive improvements going into Q2 and a lot of that is Midcon was obviously affected by Uri. But we're seeing -- we're not seeing massive growth but we are seeing the Midcontinent kind of hold the line, which is probably a little better than what -- if you and I were talking coming into the year than where we would have been, and you are seeing that. Southern Hills is a little different than Sand Hills in the sense that the majority of the volumes do come from barrels or gas that we control. So, so far Southern Hills’ outlook improved pretty good in Q2. I think we expect it to improve even more in Q3 and Q4 and that is partially driven by a slightly better Midcontinent outlook than we would have thought. And the DJ is just going through the roof. The DJ is doing quite well. And you're seeing some pretty good stuff in terms of that feeding Southern Hills as well. So good outlook on Southern Hills. And definitely volumes in areas like the Midcontinent and the DJ catching up. I think, I said on the last call, things started a little slow in the year and then you had Uri. We're definitely seeing things catch up to where we had anticipated. Midcontinent probably slightly better than what we would have thought.

Michael Blum: Second question, I wanted to ask was about A&D market? Clearly, I think it's a pretty active, more active lately in the midstream space, looks like companies both looking to pick off some assets that fit their portfolio and also that's where it makes sense. Is there anything from your perspective, like probably a general perspective on that? And is the assets that you own today, where you want to be, do you see divestitures, do you see anything you might want to add?

Wouter van Kempen: You’re right. You see a little bit more activity, at same time, I don't think you are seeing the type of activity yet that what you're seeing, for instance, on the producer side of the house where you’re seeing more broad scale consolidation? There are definitely some assets coming to market where people are trying kind of the trade asset transactions for us. I'm absolutely not saying no to that in any way shape. I also am not saying that hey we're having done things here on the table that we're very actively looking at from an acquisition point-of-view. From a divestiture point of view, we are pretty happy where the portfolio sitting today. So we're not running any projects there either. I do continue to believe, and I've answered your questions and your colleagues’ questions multiple times over the last six, 12 months, the midstream industry as a whole needs to consolidate. And I think that is something that is very, very important. There continues to be some pretty significant overcapacity in various areas. And I don't see that overcapacity being fully utilized anytime soon. So if you get into a more mature state of this industry, which we clearly are, you went from the big growth cycles into much more mature harvesting cycle then I do think M&A on a broader scale is something that is tremendously important. Are you going to see us do that? I obviously cannot [opine] on that. I do believe that DCP, as I said before, has earned the right to be a consolidator. I think, if you think about what we have done around optimizing our asset base, lowering our cost, upping our reliability and I spoke about our sustainability performance, our Scope 1, Scope 2 greenhouse gas reductions, things like that. I do believe that we know how to take assets and optimize them. But it's also M&A is not a strategy, I think M&A is an execution of the strategy potentially, but we'll see where it goes.

Operator: [Operator Instructions] Our next question comes from Spiro Dounis with Credit Suisse.

Spiro Dounis: First question on propane. Wouter, curious, can you just define a little bit on the strength we’re seeing in that market right now? I'm just curious how sustainable you think that is? And Sean, on the hedge positioned for 2022, that $0.74 a gallon. First, it seems to suggest maybe that gravitates closer to 80% as you layer in more hedges, but you mentioned that sort of big step up in the hedge position from 2021 to '22? Can you share roughly what your sort of propane hedge position is from a price perspective in '21?

Wouter van Kempen: Let me quickly start and then hand it over to Sean, Spiro. In general around propane, you're taking a look right now where inventory levels are sitting compared to the five year average, and we're obviously certainly low. We are starting to get close to the end of the summer and going into winter, feel pretty good about things right now. I think we also know that if you don't get winter start kicking in, in November, December then quickly, you're going completely the other direction but really quite helpful where things are today. And then Sean, maybe you can talk about hedging side of the house.

Sean O'Brien: So Spiro, in terms of '22, I think -- obviously propane was constructive. So if you think about '21, we were -- the biggest opportunities for hedges in '21 have been gas. Obviously, we've been able to do some stuff since then. As you think about '22, NGLs and crude have been constructive but we're still pretty likely hedged on the NGL side. We probably have about no more than one fifth or 20% of those types of hedges on the books for NGL, and propane would make up a chunk of that. So there's still a fair amount of propane upside as we think about '22. Your 80% mark, I think is about right. I think that's where we would probably if we gave a number on 22% or on 2022, right now we'd give out 80% for your hedge. As you think about '21, we're closer to 90%. So that's -- my comments earlier about leaving some of that position open, because we're a little bullish, was alluding to that 10% delta. But still a lot of room on propane. We've been able to get some of those hedges on. Obviously, the heavier end of the barrel we've been able to get some hedges on as well. But a lot of room still left if propane is to run.

Spiro Dounis: I’ll just make sure and if you can provide it. Just try and compare that $0.74 a gallon hedge position in 2022 for propane. Is there similar number you can provide for 2021 kind of where you’re hedged right now?

Sean O'Brien: For propane specifically, yes, we [Multiple Speakers]…

Spiro Dounis: And then just on ethane, understand you don't really have the ability to obviously recover or reject, make that decision each time. But sounds like commercial team working hard there to incent more recovery. I guess, what would it take to grab more out of the stream from peer. Is it simply a function of lowering the tariff downstream to make more economic? I suspect it’s more complicated than that. And have you been able to quantify at all kind of what the upside is, if you ever get to a full recovery scenario, what that could mean from an earnings perspective?

Sean O'Brien: So a couple things. The big lever is, obviously, you're incentivizing people by lowering the rate. The frac spread, the good news is I know the frac spread hasn't been conducive to recovery. But the positive is that's because gas is running so as NGL gas has happened to run more than ethane. In terms of the upside for the company, I don't know if we've ever given a number, Spiro, but I can tell you it's tens of millions of dollars for the remainder of the year if we can get into full recovery. That's the benefit of having a very stout value stream, having the pipeline getting to be able to make money in various chunks of the value stream. So it could be couple of tens of millions of upside for us if we were to go into full recovery for the remainder of the year.

Operator: [Operator Instructions] Our next question comes from Tristan Richardson with Truist Securities.

Tristan Richardson: Just appreciate all the comments on what you're seeing near-term and even looking out into 2022. Just thinking maybe a bit longer term, once you've kind of achieved some of those medium term targets, getting the balances at three handle. I'm just thinking about CapEx. You've noted on past calls there’s some [niche] capital opportunities here and there out there. But I guess just thinking about '22 and beyond, as we kind of go in and out of potential commodity cycles. Does DCP have everything it needs from an earnings or engine perspective to sustain multiple commodity cycles and keep the balance sheet exactly where you'd like it, or are there project opportunities expanding the downstream business further, et cetera, that you're thinking about longer term?

Wouter van Kempen: I think what's first and foremost, the most important thing as a commodity business to go through commodity cycles is get that balance sheet fortified. So we're running -- internally, we're running obviously, a lot of different decks and walls. But where I look at most of that is kind of the downside model and say, okay, if we get into a prolonged low commodity environment, are we comfortable running the company, having the balance sheet to get through that, continuing to generate excess free cash flow and continuing to, obviously pay the distribution. And the answers to all of those are, yes, which is a great, great thing. If you think about this industry over the last 10 plus years and the cycles we have seen for many companies, including ours that answer was fairly often. Unfortunately, no, because the industry was leveraged fairly highly. So getting to that is absolutely, first and foremost, the most important things for us, because after that you got enormous flexibility. If you talk about, hey, what are the different kind of pieces of puzzle that you would like to have, I think we've made a tremendous improvement to the business model over the last decade. If you think about where we were as 90% plus gathering and processing business, massively commodity exposed, now we're much more vertically integrated company. But would we like to have more of that? The answer is absolute, yes. I do believe and we believe, as a management team, that having a wellhead to water type of business is going to be important, call it, for the next 10 plus years, kind of the longer term that you're looking at. So we make good improvement there. But could that more be done, the answer is probably yes. So those are things that we continue to look at and say, are there opportunities around that. And so then I think the other piece that you have is there will be some investment opportunities where we believe you can make a return like around CCS and some other business models that we're definitely pursuing. But yes, it's a great question. It's something that we're looking at spending a lot of time on. Short answer, get the balance sheet really, really strong. We have line of sight to that. Now you have massive flexibility and see what you can do to move the business further downstream.

Operator: Our next question is James Carreker with U.S. Capital Advisors.

James Carreker: Just wondering if you can expound any on some of the working capital tie up that you see year-to-date and the confidence in that reversing? Is any of that related to disputes relating to Uri, and some of that drag it to 2022?

Sean O'Brien: Yes, but I'll give you some clarity. The price movement that’s been so strong, since we do have hedges in place for '21 and '22 and a little bit of '23, there is collateral requirements on those hedges. Obviously, price run ups are good things for DCP in the industry. But it does put some temporary collateral requirements on the company. 60% of that particular collateral requirement rolls off by the end of the year. So yes, we do see that one obviously improving and that's assuming prices stay really strong. But 60% of that will be gone because we’ll have realized those hedges and again, realized pretty strong environment. And then on Uri, I mentioned that in Q1 that we've done a pretty good job of coming out right out of Uri, about 90% of our collections in hand. We've been able to improve on that. I think we've picked up another roughly 20 million since the since Uri, since Q1. There are some disputes still outstanding, those probably I think you're thinking about it right. Those could be longer term. But we definitely see the working capital situation improving significantly between now and the end of the year. But I think some of those Uri disputes -- we were very confident in the revenues we booked. But obviously, some of those are going to get held up and maybe have to get litigated over time. But we'll keep you in the loop on that but not a big driver. And I think some of that helps himself by the time we get to the end of the year, a little bit of carryover into 2022.

James Carreker: Then maybe just a clarification I guess, I think your year-to-date working capital usage has been around $200 million. So if it's not Uri, is there any item or set of items that's driving the big use of capital?

Sean O'Brien: It's the collateral on the hedges is the biggest driver on that working capital.

James Carreker: But I guess, I thought I saw that the collateral is about $200 million and then separately working capital is about $200 million.

Sean O'Brien: So you've got some normal timing. This was a heavy payout period for the company. So that's just going to happen normally. But the big, I would call, temporary drivers are going to be the collateral and the hedges and the Uri collections.

James Carreker: If I can follow-up with one more, I think I saw one of your parents announced resumption of frac for at Sweeney, and I know you guys previously had that option for fracs two and three. Does the resumption of that construction bring potential ownership of some of those fracs back on the table? And now as your balance is in better shape, any opportunities around that that you see?

Wouter van Kempen: Well, we obviously know, Phillips 66 fairly well, as you alluded to. We use the half and ownership option for fracs two and three and five at last year during kind of massive COVID time not to exercise that. We haven't had any conversations since. Again, earlier our real focus is around getting the balance sheet and right. Could that come back to the table at some moment? As I said, we know Phillips 66 fairly well, they know us fairly well. And if there's something that makes sense and probably could come back or we just keep it where it is right now. So I would say there's no active conversations around it.

Operator: Our next question comes from Christopher Lee with Mizuho Securities.

Christopher Lee: I was just wondering is, your kind of thoughts on the consolidation in the DJ Basin, as far as the producers. And I know that they also have some midstream capabilities. I’m just kind of wondering how that impacts the outlook for the DJ?

Wouter van Kempen: I think it's not that big of an impact for us. If you think about it, the three companies that are coming together. So they're all in various ways, shapes or forms, we have customer relationships with them. At the same time, even combined, they will be one of our smaller overall customers. So there's still to focus on some of the main customers that we're having there that are larger them. At the same time, we do see it as a good thing when producers come together, kind of focuses their effort, they cost out, so they can direct and they add more of their dollars up to G&A or over other corporate functions, but to the drill bit. And when all of those where we have contracts in the DJ Basins, they are life of lease dedicated acreage. So there really is not a competitive issue. If someone has small midstream business themselves, then they say, hey, we can take stuff off of that acreage and direct it somewhere else. Contractually, that is not allowed, that's not possible. So net-net, I look at it as a probably a small positive for us.

Christopher Lee: And then just as far as cost expenditures cadence for the rest of the year. Should we expect more deferred costs from Q1, some chunk you're kind of timing at the end or was that mostly [Multiple Speakers]…

Sean O'Brien: Chris, there's definitely still some catch up. Obviously, Q2 was higher than Q1. But the run rates that we've had so far this year are just very, very, very low. So the good news is, you may recall back when we gave guidance, we took 120 million plus out of our cost base in 2020 and we said we were going to hold on to all of that. And we still were on par and feel confident about that. But there is still some dollars to catch up on. Uri was a big event, it really set some of our progress back and we're in catch up mode. And you'll see that continue through the second half of the year, that'll also impact sustaining capital.

Operator: Thank you. And I'm currently showing no questions at this time. I like turn the call back over to Mike Fullman for closing remarks.

Mike Fullman: Thank you all for joining us today. If you have any other follow-up questions, feel free to reach out and give me a call. And with that, have a good day.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.