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DCP Midstream: Distribution Remains on Target

Despite the lingering effects of hurricane damage to its Discovery offshore gathering system in the Gulf of Mexico and an ongoing integrity project at its Douglas pipeline in Wyoming, DCP Midstream Partners LP has no plans to lower its payout, according to CEO Mark Borer.

"Our business plan is reasonable and achievable," Borer said in a conference call with analysts last week. "Our current distribution is prudent and appropriate and we intend to maintain it. We anticipate near-term challenges until our operations at Discovery and Douglas come back online and new projects ramp up, but we are confident we can overcome these challenges."

DCP announced in October a quarterly distribution of 60 cents/share on distributable cash flow of $12.2 million for 3Q2008. The partnership, which previously forecast 2008 adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $90-95 million, last Monday forecast 2009 EBITDA would rise to $112-117 million, and in 2010 would hit $128-142 million.

"Our plan is to maintain our current distribution despite any temporary shortfalls resulting from Discovery and Douglas," Borer said. "Once our organic projects come online in mid-2009, our revenues will increase and coverage will improve significantly thereafter."

The Discovery system sustained storm damage when hurricanes Gustav and Ike hit in early September and the system has not been accepting gas from offshore producers while repairs are being made. DCP owns a 40% interest in the Discovery system, which is operated by Williams. Discovery includes an offshore natural gas gathering system, the Larose natural gas processing plant and Paradis fractionation facility. DCP previously said damage included the severing of an 18-inch lateral from its connection to a 30-inch diameter mainline in 250 feet of water.

"We expect repairs to Discovery's 30-inch line to be completed in late December," Borer said. "Approximately 85% of curtailed offshore buying and associated margins will be returned to production once the 30-inch is returned to service, with the remainder planned to be restored about 30 days after that."

Following integrity testing this fall on the Douglas Pipeline in Wyoming, DCP decided to further upgrade the pipeline to assure future integrity, improve system reliability and reduce operating costs. DCP has said it anticipates that the work will be completed in the first quarter of 2009 at a total cost of approximately $13 million. The work will be completed in phases so that volumes will begin returning to the system prior to the end of the project.

In September DCP agreed to purchase Michigan Pipeline & Processing LLC (MPP), a privately held company engaged in natural gas gathering and treating services for gas produced from the Antrim Shale of northern Michigan and gas transportation within Michigan, for $145 million (see NGI, Sept. 15). The deal was made in an effort to diversify DCP's geographic operational area, the partnership said.

Prior to the MPP deal DCP -- managed by its general partner, DCP Midstream GP LLC, which is wholly owned by DCP Midstream LLC, a joint venture of Spectra Energy and ConocoPhillips -- had gas operations in Louisiana, East Texas, southern Oklahoma, the Piceance Basin in western Colorado and the Powder River Basin in Wyoming.

The MPP deal came on the heels of DCP's $150 million investment to expand gathering operations in western Colorado's Piceance Basin (see NGI, Sept. 1).

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