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MarkWest Energy Partners LP (NYSE:MWE)

Q4 2008 Earnings Call Transcript

March 03, 2009 at 4:00 pm ET

Executives

Frank M. Semple - President and Chief Executive Officer

Nancy K. Beuse - Senior Vice President, Chief Financial Officer

Randy S. Nickerson - Senior Vice President, Chief Commercial Officer

John C. Mollenkopf - Senior Vice President, Chief Operating Officer

Andrew L. Schroeder - Vice President, Finance, Treasurer & Assistant Secretary

Dan Campbell – Assistant Treasurer

Analysts

Noah Lerner - Hartz Capital

David Jordan - Axiom Capital

John Edwards - Morgan Keegan

Helen Rue - Barclays Capital

Xin Liu - J.P. Morgan

Eric Kalamaras - Wachovia Capital Markets

Michael Blum - Wachovia Securities

Teresa Fox - Stone Harbor

Louis Shammy - Zimmer Lucas

Yves Siegel - Aroya Capital

Operator

Welcome to the MarkWest Energy Partners fourth quarter earnings conference call. (Operator Instructions) I will now turn the call over to Mr. Dan Campbell. Thank you, sir, you may begin.

Dan Campbell

Thank you, Sarah. This is Dan Campbell, assistant treasurer of MarkWest and we thank you for joining us today. Our comments today will include forward-looking statements which involve risks and uncertainties and are not guarantees of future performance.

Actual results could very significantly from those expressed or implied in such statements and are subject to a number of risks and uncertainties. Although we believe that the expectations expressed today are reasonable, we can give no assurance that the expectations will prove to be correct and we caution you that projected performance or distributions may not be achieved.

Factors that could cause actual results to differ materially from their expectations are included in the periodic reports we file with the SEC. We encourage you to carefully review and consider the cautionary statements and other disclosures made in those filings, specifically those under the heading Risk Factors. And with that I will turn the call over to Frank Semple our Chairman, President, and Chief Executive Officer.

Frank Semple

Good afternoon and thanks to everyone for joining us on the call. Following my brief overview on our financial performance and the continuing progress on our key business objective, I will let Nancy Beuse, our Chief Financial Officer to update you on our balance sheet activities and updated guidance for 2009. We are going to provide plenty of time for your question and joining us for the Q&A is Randy Nickerson, our Chief Commercial Officer; John Mollenkopf, our Chief Operations Officer; and Andrew Schroeder, Vice President of Finance and our Treasurer.

Given the extremely challenging market conditions, it is important that we focus today on our key priority of capital reduction, liquidity improvement, and the sustainability of our distribution. Over the past five years, we have delivered strong distribution growth by unit holders.

With the current economic conditions and the collapse of the capital market, as you would expect, we have adjusted our growth strategy and implemented a plan that balances our customers’ need with our balance sheet capacity. Our performance last year and our financial plan for 2009 including the recently announced Marcellus partnership, puts us in a very good position to support our capital programs and also allowed us to maintain our current level of distribution.

For the full year of 2008, our adjusted EBITDA was $289 million; Distributed cash flow was $198 million and year-over-year distribution growth of 69%. Our capital program for 2008, the $640 million, which included the acceleration of our very strategic Marcellus project, the significant expansion of our Woodford system and the extension of our Western Oklahoma System into the Texas Panhandle. This capital program came as a result of working with our producer customers to efficiently support their drilling programs in our core operating areas. This program also included several large scale future project such as the Arkoma connector pipeline and the steel and ethane reformer project that are on track to be completed in 2009 to 2010. We raised $660 million in early 2008 at very competitive rate to support this project.

However, current capital market environment we have re-evaluated our business plan and have taken the critical steps necessary to meet our balance sheet and distribution objective. Over the last couple of days, we completed the expansion of our credit facility and closed the Marcellus partnership with mixed stream and resources. These steps provide the necessary liquidity to support our 2009 capital plan.

In addition, we continue to refine our growth capital programs for 2009 and 2010 and we are evaluating the additional joint venture opportunities that would further improve our liquidity and reduce our capital requirement. Nancy is going to provide details of our balance sheet activities in a minute but our current capital plan for 2009 is approximately $200 million, which is primarily driven by the completion of the Arkoma Connector and the SMR project. For the preliminary 2010 capital program, the most significant component is for the continued development of the Marcellus Shale project, which is very dependent on the requirements of Range resources and other producer costumer, who are ramping up their operations in the area.

In our earnings press release, we discussed the decision to monetize a relatively small portion of our crude oil hedges. We took advantage of very favorable pricing to on line the small percentage of our positions in 2010 and 2011 with minimal impact to our overall hedge portfolio. The result is $28 million of incremental liquidity in the fourth quarter. We had a lot of success in 2008 across all the core operating areas. Today, however, I want to spend time discussing our work in the Marcellus Shale and the partnership that we just closed. In spite of the sudden decline in the natural gas prices and the global economic crisis, we continue to see focus and the successful exploration and development of the Marcellus Shale in the Southwest Pennsylvania. While a number of companies seem to be slowing down their drilling efforts, Range resources continues to execute their very aggressive and efficient drilling program and produce solid results. We spent a lot of time in late 2008 to early 2009 catching up with Range development of the Marcellus acreage. We have completed the installation of five compressor stations and a significant system of high pressure gathering pipeline to support the current 35 million cubic feet of gathered gas in the Range production.

By the end of this year, we will be operating nine compressor stations and with these facilities in place, we will have the backbone required to gather in excess of 100 million cubic feet a day. We are also nearing completion of our first project processing plant at our Houston, Pennsylvania facility, which is a 30 million cubic feet a day plant. This is a big step and with additional modifications made to the initial refrigeration plant, will bring our processing capacity to roughly 80 to 100 million cubic feet a day. The completion of the cryogenic processing facility comes just in time as Range is well underway to utilizing the expanded processing capacity based on their aggressive drilling program. We also continue to focus on the completion of our second cryogenic processing plant, which will have a capacity of 120 MMcf/d. This additional plant is critical to supporting Range’s continued ramp up at their production in 2010.

Another key milestone in the development in the Marcellus was the closing of our partnership with M&R last Friday. We have worked very diligently with Range and other producers such as Chesapeake Energy to be able to fully support their needs while at the same time optimizing our capital investment in Marcellus. Looking closely at the M&R transaction, MarkWest contributed approximately $100 million of asset under the 60/40 partnership and M&R will contribute the next $200 million of capital, which will support our entire 2009 capital program. For 2010 and 2011, MarkWest will provide approximately $200 million of incremental capital for the projected expansion of the Marcellus facility including the construction of the [7.40] plant and associated NGL facility.

Marcellus capital program has been refined to support Range and other producer drilling program and we will provide regular update on our quarterly conference call. Our partnership with M&R provides a number of important benefits. First is that we have a very strong partner that brings deep insight and support to our efforts in Marcellus. Second is the partnership that allows us to meet needs of Range resources and other producers with a significantly reduced upfront investment on our part. Finally, we will provide the capital flexibility that is required to maintain the partnership position as the premier provider of midstream services in the Marcellus.

To conclude, our diverse assets are situated in some of the best resource place in the US. As evidenced by a recent success in the Marcellus and the Woodford, we continue to be in a great position to participate in the significantly quality midstream infrastructure to support the demand for natural gas.

As a result to the quality of our customers, our people and the location of our four operations, we continue to uncover significant opportunities. However, I want to be clear that we anticipate access to the capital markets will be challenging over the next several years and MarkWest would balance the economics of future growth opportunities with the availability and the cost of capital. Our team is very results oriented and we have a very strong track record of meeting our objective. I firmly believe that we have the plan and the capabilities to meet the challenges of the current market and continue to deliver long-term value for our unit holders.

With that, let me just hand it over to Nancy.

Nancy K. Beuse

Thanks, Frank. Since Frank already talked about DCF, adjusted EBITDA, and distributions for 2008, I will not spend much time on this topic. Although I do want to mention that while our performance in the first part of 2008 was quite strong, our fourth quarter results reflects a very challenging economic condition in the final few months of the year. Our segment operating results for the fourth quarter were negatively impacted by the precipitous declining commodity prices and the disconnect between NGL and crude oil prices. Our Northeast segment was hit the hardest due to negative fracs spread that we saw in the fourth quarter.

As predicted by our statistical analysis, the correlation to NGL and the fracs spreads had returned more normalized ranges in 2009. Before moving to our balance sheet, I want to mention that our distribution coverage ratio for the fourth quarter was 1.14 times and for the full year was 1.39 times.

Let us move to our balance sheet and liquidity position as of December 31st. At year end, we had available capacity of $108 million on our revolving credit facility when you take into account $58 million in letters of credit. Our total debt at yearend was $1.2 billion, which is comprised mainly of $1 billion of senior notes in free tranche with the earliest tranche due in 2014. With that schedule, we do not have any short term payback requirement on this note.

For the fourth quarter, our leverage ratio was 3.8 time, our interest coverage ration is 4.5 time and I get the total capital with 49%. These results reflect our decision to monetize a portion of our 2010 and 2011 commodity hedges in the fourth quarter of 2008, which provided additional liquidity of $28 million. Our decision was driven by the very favorable prices at which we could settle these hedges while at the same time improving our liquidity position. We believe this was a good decision especially when you consider the poor capital market low NGL prices and the ongoing impact of Hurricane Ike.

The fourth quarter unwinds as well as an additional 18 million of unwind is completed in January of this year that place prior to the closing of the M&R partnership and the credit facility expansion.

From a long term perspective, our hedging philosophy is to manage the risk associated with commodity price exposure and to meet our distribution objective. With that in mind, in February of this year we opportunistically rehedged a portion of our forecasted commodity position for 2010. We are now approximately 80% hedged in 2009, 50% hedged in 2010, 40% hedged in 2011, and that are consistent with our rolling 36 months commodity risk management and objective.

Let me shift gears and discuss our liquidity position for 2009 and beyond. We continue to carefully manage our balance sheet and maintained a comfortable operating buffer around our bank covenant. We recently expanded our revolving credit facility by $85 million to increase borrowing capacity to $435 million. In an incredibly challenging lending environment, we were quite pleased with the support we received from bank group and in fact, added one bank to our syndicate. The result of this financing leaves us with current revolver borrowing cost at less than 5% and broad diversity in our bank group.

Let me turn to our guidance. For 2009, we anticipate we will spend approximately $200 million on gross capital and we are forecasting 2009 DCF on a range of $160 million to $200 million. Obviously, we are in a very volatile commodity environment and this DCF forecast assumes the current forward estimates for crude oil and natural gas. We believe it is very critical to provide transparency to our investors and analysts which is why provide the DCF sensitivity table and our earning to release. This table provides the basis for our guidance as a very effective tool for analyzing the impacts to DCF of crude oil and natural gas prices and a historical average NGL correlation relative to crude over the past three years.

Our analysis assumes the effective hedges we have outstanding as of March 1st and our estimated production through yearend 2009. I really want to point out that for the past 10 years; we look at an average annual basis. The relationship between NGLs and crude oil has been within one standard deviation of the monthly mean that is predicted from our R squared analysis. The short grades of time or the relationship is an upside of one standard deviation but these periods are relatively infrequent and it typically last only a couple of month. As you know, we experienced pricing relationship significantly below one standard deviation in late 2008 but we have seen dramatic improvement since then. In fact, for the first two months of 2009, pricing relationships have largely returned to the mean. There are a couple of takeaways from the DCF table. First, you will note that we are much more sensitive to correlations than we are the crude oil prices.

In addition, even with conservative assumptions for commodity prices and NGL correlation, we can maintain a distribution coverage ratio an excess of 1.0 time at our current distribution rate.

To conclude, our near term focus is to continue the strength of our balance sheet in 2009 and beyond. The steps we have taken recently including developing strategic partnerships such as M&R joint venture, increasing our revolver capacity and advantageously unwinding certain hedge positions, put us in a strong position to support our 2009 business plan, including the $200 million of growth CapEx.

In short, we believe we are proactively and aggressively managing the challenges for 2009 and 2010, while still preserving future opportunities to create long term value for our unit holders.

With that I will turn the call to Frank.

Frank Semple

Thanks Nancy. The current economic conditions certainly pose challenges for the industry. We have built a culture at MarkWest that based on execution and performance and I believe that those qualities are important no matter what challenges we face, but we also understand that our short and our long term success will depend on conserving every dollar of capital continuing the focus on our operational execution customer service and leaving no stone unturned in terms of improving our financial flexibility.

With that Sarah, let me turn it over to you to open us up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Noah Lerner - Hartz Capital.

Noah Lerner - Hartz Capital

Quick question, I was just trying to get my hands around the chart that you have in the back tied into the guidance. With the guidance at 16,200, where does the basic guidance fall on that matrix?

Frank Semple

Yes, that is a good reference point, Noah. I mean I do not know if you have that table in front of you.

Noah Lerner - Hartz Capital

I do.

Frank Semple

Yes, I think that obviously we tried to provide a range of prices and ratios that encompass what we could not anticipate for 2009 and our guidance was based on a subset of that table, and you are going to see, in the several quarters you will see this type of the table that provided and as we move through the year it will be updated based on the last quarter actual performance, so, with our guidance, and Nancy, if you want to step through where we are.

Nancy Buese

Yes. I think probably the right place to look is that somewhere between nine to one and 10 to one as we were sitting and then I will look at the $40 crude price. So, if you look at the historical average and we say we are getting closer to the mean that the topside of that guidance is sitting right there at that 198 million to 200 million bucks.

Noah Lerner - Hartz Capital

Yes.

Nancy Buese

And then if you kind of take your own thinking about where correlations are going to go or where crude price will go, but again I think from our perspective what is important even as you go to the bottom of the box and you deviate over towards the right hand side, we are still at the bottom level of that guidance.

Noah Lerner - Hartz Capital

Okay. That is…

Nancy Buese

Well, again, we try to put this in your hands and kind of let you make your own decisions about where you believe correlations and crude prices were going to go. We do not have a great feel for that other than what we can feel from strip, but this is going to gives you a feel for the box. At the end of the day we were more sensitive to correlations and our guidance is supported with the current level of distribution at almost any point on this box.

Noah Lerner - Hartz Capital

Okay, yes good. Now, I am accurate to where you are so now I can make my assumptions off of where you guys were thinking. Second question I have, I know you talked about this in the past. All of your hedgers are with crude oil and I am curious in light of everything that went on last year and trying to get handle of it and the market seemed to be getting a little thicker, why you guys have not, what logic you have used as far as staying with the non-specific hedges against the NGLs?

Frank Semple

Sure, yes, that is a good question. I mean Nancy touched on this in her comments earlier and it is somewhat difficult to get your mind around right now given the fourth quarter disconnects that we had with NGLs and in crude oil, but we spent a lot of time at Nancy’s comments and also in the footnotes of this table, describing what we said historically. We ran our forecast correlations based on a three-year regression and what we are basically reinforcing in Nancy’s comments and with this table is that even though we had a big disconnect in the fourth quarter between NGL prices and their relationship to crude oil, based on the historical analysis we are seeing a reversion back to mean just taking with predict with that statistical analysis. The fact is that right now if you look at in the forward commodity market and you were going to do hedges that direct NGL there is still a big price difference assuming that a disconnect will continue in the second, third and fourth quarter of 2009 for instance and our statistical analysis would indicate in fact we are seeing it in the first quarter that we have seen a reversion of those NGL prices and their relationship to crude back over to mean and it is a work on me.

So, it is something we feel very strongly about, it is based on a lot of analysis. We have a lot of discussion on our third quarter earnings call about that continued discipline within our hedging program and now as we have entered 2009 we have seen what we predicted based on the statistical analysis and that is the reversion back to the mean. So, you just give us too much of value when you go out for the next four quarters and next eight quarters, 12 quarters when you hedge with NGLs because the counterparties out there are assuming a standard deviation disconnect.

I just think the economics are clear there over the long term but you are better off using the crude oil.

Noah Lerner - Hartz Capital

Okay. One last question then I will jump off. This is much more of thinking long term. With the budget busting proposal that came out of Capitol Hill last week and some of the impacts to the oil and gas industry, although you guys are not in P Company, what kind of impact do you see having on how might that adjust how you operate and go forward as far as growth goes and other things, if it comes to pass that the IDCs and the percentage depletion are degraded, the benefits are degraded to the drillers who are your customers?

Frank Semple

The best way to answer that would that we can speculate or provide our perspective on what the impact would be, but the real issue is our relationship with our producer customers, no, what is great is you can go back to the transcripts of all of our major customers particularly in the Q&A and you can see how they are evaluating and anticipating the impacts, not only what comes out of Capitol Hill but also just the pricing of the basic commodity and our goal is to continue, we know we are blessed with really good relationship with our producers. We are joined at the hip and we work with them on a very close basis to understand how they are analyzing those impacts and again providing our analysis of what the capital is going to be required.

For instance, if you look what the Range or Newfield had said about their 2009, 2010 drilling programs in Western Oklahoma, Southeast Oklahoma, the Marcellus, they give a very precise answers to what those impacts are going to be and how that drives their economics in their drilling programs. We have to then go back and determine what the capital programs look like and then also how we are forecasting our operating income and capital required for these programs and obviously we are conservative on our estimate. So, really we rely heavily on the producers’ evaluation, their analysis and their feedbacks.

Operator

Your next question comes from the line of David Jordan - Axiom.

David Jordan - Axiom Capital

Gentlemen, thank you. First of I want to say thank you because I am a shareholder and I think you have done just a stellar job in these times and I just want to, my mother taught me how to say thank you, but I do have a couple of questions.

Number one, could you just in light on how much what do you think the cap needs are in terms of tapping the equity market?

Number two, the Marcellus is probably your biggest supplier over the next several years and how much will that account on peak production over the long term and how long is that you think that will enable you to be supplied with how much of your throughput?

Number three, you said that the distribution at DCF what is it, 160 on a low side?

Nancy Buese

Correct.

David Jordan - Axiom Capital

Okay, and that divided by 57. That is 280 a share, if I am right, if I did the math right. So, basically if we do not go outside of the bell curve materially, I mean are we looking at a possibility down the road if things continue and you make more joint ventures and that kind of thing that there could be upside in the distribution. I know that everybody is worried about limiting the downside but you are going to look both ways in life.

Frank Semple

Okay.

David Jordan - Axiom Capital

But I just want to say thank you anyway. That was the most important thing I want to say.

Frank Semple

Yes, David, I appreciate that. I think you had three main questions initially. The first is given our capital program for 2009 and in our release discussion around 2010, really driven mainly by Marcellus with our perspective on the equity market. We do not anticipate that the equity markets are going to magically get better over the course of the next 12 or 18 months.

So, we have developed our plan around the assumption that we are not going to be able to effectively and efficiently access the equity markets. Now, we may get surprise and Nancy would certainly tell you that we are prepared for both high yield and in equity to access those markets, but we have to basically assume that we have to provide the liquidity from other sources and I think we are building a pretty good track record for that I mean the partnership, as I mentioned earlier with [M&R] was a huge step…

David Jordan - Axiom Capital

It was great.

Frank Semple

…and allowing us to maintain of our strategic position at Marcellus and also significant release our capital. So, that is an important step, of course the ability to go out and get $85 million of increased revolver capacity was also important and so we have done that in very difficult challenging markets and if you look in 2009, would that be some other things that tapping the equity markets. It is going to be a challenge and we are just not assuming that magically we are not going to be able to tap those markets.

David Jordan - Axiom Capital

I made a mistake. You meant the capital market is not the equity markets. That is my mistake.

Frank Semple

But the point is really the same. We have got to continue to work on levers that give us the additional liquidity as we move to throughout 2009 and enter 2010, and if we have not done the JV in the fourth quarter or announced that in fourth quarter, I think we have less credibility there but I think obviously, we are blessed with some great assets and some great opportunities, and so as I mentioned is that the goal is to balance that ability to grow strategically at the same live within our current balance sheet asset.

The Marcellus, my goodness, is again, I would reference you back to the Range earnings release in their earnings call and their transcript because those guys that the mantra is pretty consistent when we listen to Newfield in Woodford, as far as the Woodford is concerned and Range at Marcellus, increasing reserves and continuing to improve their cost structure their performance from their horizontal joint program in both those areas has been pretty spectacular. So, these are 20 plus year one live reserves, so again, you just go back to their transcript and listen to other projection and growth. In the Marcellus, Range, will triple their volumes this year and that they ramp up in a continued or get volumes of three-rig program exiting ’09 with fixed rates by in plenty reserves there, very efficient performance and they are drilling within their cash flows and again I am talking about those Range and Newfield, so, a very consistent perspective if you go back and read their transcripts.

So, we are very bullish in the Marcellus, particularly with the JV that we just completed because it gives us the capital capacity out there to stay ahead at Range and other producers that are really focused on that great [shelf life].

The last was on this, low end of our range and if you refer to our ’09 DCF sensitivity table, you have done the math right, 55 plus million units outstanding in the current distribution. Certainly distributions and maintaining our distribution is job one for us, we are very, very strongly preserving and increasing overtime the value to our unit holders. That is why we continue to hammer on this priority for the distributions. You continue to see that in this table that we provided, I think that is the whole objective with the table, just to your point is that yes commodity prices have started and correlations specifically started to return.

So, if you assume about $50 crude oil prices at the historical mean for the pricing relationships between NGLs and crude oil you can see in that table that the $200 million range for DCF which gives us significant headroom on our distribution coverage ratio, but I will tell you that maintaining a healthy coverage ratio is also very, very important. That is really what our intent is, is to manage all these levers to make sure that we are protecting the downside, not only ’09 but 2010 and beyond and to the extent that we do see a recovery in the commodity markets specifically for us on crude and NGLs then I think that is all I can say.

Operator

Your next question comes from the line of John Edwards - Morgan Keegan.

John Edwards - Morgan Keegan

Hello everybody, can you hear me?

Frank Semple

Yes, John.

John Edwards - Morgan Keegan

Congratulations on the joint venture by the way. The question I had on the guidance relative to the joint venture, could you just give a little more color on the guidance, it looked like it was increased from the last quarter table that you putout, but simultaneously the Marcellus assets were being put into the joint venture with your retaining 60%. So, I just wonder if you could expand a little bit on the math how that works.

Frank Semple

John, just to make I am clear. Are you referring to the comparison between the current DCF sensitivity tables versus last quarters given the JV or…?

John Edwards - Morgan Keegan

Yes, last quarter, you presumably had a 100% at the Marcellus assets and now the guidance reflects I presume outsourcing or putting the Marcellus assets into a joint venture with the retaining less than 100% but the guidance numbers went it up.

Frank Semple

I got it, yes.

John Edwards - Morgan Keegan

Yes, I could not quite follow the math on that. I thought maybe you could explain a little bit better or maybe so I could understand it at least.

Frank Semple

Absolutely, yes, has been Randy’s ready to talk on this. Go ahead.

Randy Nickerson

Sure, John. I think the update in the guidance is kind of an all encompassing thing, in terms of reflecting the joint venture, yes, it does and I think the thing you need to think about in terms of the joint venture is that we are in very early stages of our development, of the Marcellus play right now and so that really the longer term view there is that we will see significantly increasing EBITDA streams overtime.

Remember, our first assets were in place on the ground in October of last year. Our accumulative investment as of the end of the year was about $100 million and we were not anticipating a huge EBITDA contribution overall in 2009 from the Marcellus assets to start with. I think kind of the other consideration is that and we touched on it in our release in the discussion is that we did in the first quarter as well doing incremental piece of some hedge unwind, which is also reflected in this guidance table and this current earnings release. So, those are probably the two big components in terms of as you think about and go forward.

John Edwards - Morgan Keegan

Okay, so let me just make sure I understand. So, I take what you mean is that you are including in it a portion of the hedge online and you are also including a little bit greater EBITDA or cash flow from the Marcellus than you are originally anticipating. Is that a fair restatement of what you are saying?

Randy Nickerson

Well, EBITDA from Marcellus is probably about the same but it now reflects only our 60% share whereas the previous version reflected the full 100% but the hedge unwind that we did was not in our previous plan and is now in the plan that is contained in the earnings release that we did yesterday.

John Edwards - Morgan Keegan

Okay, so that is the $18 million or is that the $28 million?

Randy Nickerson

The $18 million.

Frank Semple

That is the biggest difference.

John Edwards - Morgan Keegan

Okay and then the other question I had is I think before the joint venture, I think you have expected capital spending of $300 million and then I was under the impression that under the joint venture, you are contributing $100, the partner M&R is contributing $200 so in my simple math I was thinking your remaining expenditures would be just $100 but the press release said $200. So, what am I missing there?

Frank Semple

Yes, you are correct. Last earnings call, we were, just prior to the JV, we were discussing a kind of a preliminary guidance number for the 2009 at $300 million and that included the then current perspective implants for the Marcellus as well as the completion of the SMR, the completion of the Arkoma connector pipeline and with the JV, we have been as we stated earlier, with the JV that gave us the ability to expand the scope of the Marcellus project and essentially all that increase brought a $200 million of capital for Marcellus that is going to be covered by the M&R contribution and so it takes essentially all of the required capital for the Marcellus for MWE hope for 2009 plan but instead of that $300 minus $200 being $100, you also some additional projects that are around our other cooperating areas, Western Oklahoma and East Texas that will primarily that will develop later in the year after the third quarter earnings call and today.

So, we had the offset of $200 million with the JV but we also have the completion of those large scale projects, the SMR project and Arkoma. That is the lion share of that $200 million, incremental about $200 million in 2009 and then that we also have some additional just expansion projects in Western Oklahoma or Southeast Oklahoma or East Texas.

John Edwards - Morgan Keegan

Okay, great and then on the $85 million expense of the credit line, if you could give any color on what that cost and then if my math is right, I think your liquidity is now at $193, if that is wrong if you could correct me on that.

Nancy Beuse

That is pretty close from the liquidity number John. Relative to the expansion of the credit facility, we did make a modest change in our grid and paid some fairly modest fees to the banks for, and also the consent for the JV as well as the upside to the accordion. So there is a couple of things that were going on there but we felt like we got very good participation from our bank group and we are quite pleased with the execution of that credit facility upsize.

Frank Semple

Yes, and I will echo those comments. I think that as tough times, we were looking at the completion of the JV that they had required some additional liquidity and financing spread and then the response we got back from our lead bank obviously and the rest of our bank group is very responsive, working out the holidays and really coming up with what I consider to be a very balanced solution for expanding credit facility with pretty challenging but we got it done so I think that all in all, it is a win-win because again we needed to have expand credit facility, provide liquidity while executing the business plan and support the JV.

John Edwards - Morgan Keegan

Yes, I mean, congrats again on executing this in some very, very challenging circumstance. So I will look forward to your updates here and the future.

Operator

Your next question comes from the line of Helen Rue - Barclays Capital.

Helen Rue - Barclays Capital

Just a couple of questions; first one on the updated DCF guidance table, it looks like in your previous; the one that you disclosed previously high oil to gas spread was favorable. You DCF now, it seems to be the opposite. I was just wondering was there some sort of contract mix change?

Frank Semple

Helen, I think the primary thing you see in there with the previous statement we were looking at a guidance range that had $90 crude oil on the top of it and we have kind of shifted our view in that regard to reflect current pricing models and what does that for us in terms of our operations as if it puts into an ethane rejection mode. A lot of the boxes that you see within that table so it kind of, I think that is what primary effect and difference between the two in terms of that piece of sensitivity.

Helen Rue - Barclays Capital

Okay. So you are assuming some ethane reduction throughout 2009.

Frank Semple

Well, basically what we do when we are preparing that table is we will look at the specific gas price under those relationships and where we are from a correlations perspective or ethane and the models determines whether under that scenario which should be rejecting or recovering ethane and that factors that in terms of our overall liquid production.

Helen Rue - Barclays Capital

Okay, so no significant change in your key mix.

Frank Semple

No, not a big contractual in the mix change.

Helen Rue - Barclays Capital

Okay. Secondly, what kind of volume assumption is behind this sensitivity? Are you assuming of flat volume across your system?

Frank Semple

I think the answer there is very similar in that we are looking at things going on a system by system basis and based on our discussions with our producer customers and what their drilling plans are for each of those systems. So it is a broad answer because we are probably anticipating growth and certainly in the Woodford and the Marcellus as we see it in some of the other areas we will pick I think what we probably consider a fairly conservative view around where those plans would lay out.

Helen Rue - Barclays Capital

Okay, alright. And then just another quick question is the debt the to EBITDA ratio, you said 3.8 times. I am just wondering of whether calculation of EBITDA, do you add these one-time gains you have on commodity, hedge monetization or maybe if you were to buyback debt, I mean does that get counted into your EBITDA just based on the credit, how the credit agreement is set up.

Nancy Beuse

It does. Those do get added get.

Helen Rue - Barclays Capital

Okay and also do you get some credit on the organic project that you have spent that has not come online?

Nancy Beuse

Correct, there is what we call material project adjustments within our credit facility and that basically allows some credit for projects that are in process in the capital spent toward those so there is a kind of pro forma adjustment for that. That is something we work with our leader Range on in terms of our quarterly compliance certificate.

Helen Rue - Barclays Capital

Okay, great. Just one lastly, so the $100 million that you put into the M&R joint venture, does that include the $30 million refrigeration plants and the $30 million cryo plant? What are the assets that are included in that $100 million that you put in?

Randy Nickerson

All the assets that we have installed to support Range and other producers in the Marcellus, all those in connection with that are put into the joint venture.

Frank Semple

Yes, so those two points…

Randy Nickerson

If you will include those two plants, [120] we intend to build this year, all the compressor station, the high pressure headers, everything. What we did not want to and it is important to maintain that relationship with our partners is obviously to have some in, some out and opportunities for disagreement. We worked very hard to make sure we did not have any of those and so everything in that area is all included in the AMI kind of the we build the, there has been a lot of times I met the AMI in that area. So everything in the AMI is included.

Operator

Your next question comes from the line of Xin Liu - J.P. Morgan.

Xin Liu - J.P. Morgan

Can you comment on your mid-continent activities in that area? We have seen a big shutting in production there. I wonder what you have seen around your systems.

Frank Semple

Yes, Xin. As far as the mid-continent gas price, naturally gas price later has been mostly very been hammered, very volatile. And Randy mentioned it earlier, if you looked at the 2 main areas of operation in Oklahoma or MWE, we have the basically the Woodford Shale, Southeast Oklahoma area and we have the Western Oklahoma area basically the Anadarko and now the Granite Wash and we had centered to, the producers are responding to the low gas prices but actually as far as the traditional Anadarko vertical wells that production that we gather in process in that area, things are really flat. What you were really seeing now, but we do anticipate in our plan that that is going to moderate over 2009. I mean we do anticipate that the traditional Anadarko drilling programs and based on the producers perspective on their rig count in that area that you are going to see some decline and we would like to have decline into our Anadarko volume towards in Oklahoma.

So, what we are seeing also is we just completed the [South Range] pipeline over in panhandle into the Granite Wash and Newfield has had some great results with their horizontal program and we are basically add capacity with our plant facilities in Western Oklahoma and so we believe we are seeing some decline from the traditional Anadarko system and they are seeing significant increase ramp up in the Granite Wash area that is primarily driven by the success of Newfield in that area.

In Southeast Oklahoma, again those volumes are mainly driven by Newfield and again, I will refer you to their transcript where they gave a lot of detail but they are anticipating that 30% increase in their volumes in 2009. They are getting more done with less. They are getting good procurements, lower cost out of the horizontal drilling program and so we anticipate an increase in the volume. Again, we have taken their projections and we have essentially taken a conservative view as far as what we are actually going to see in our system. We got a lot of capacity and capability in Southeast Oklahoma.

From a pricing standpoint, Southeast Oklahoma also is going to benefit with the completion of our outcome or connector pipeline which essentially takes those, allows those volumes to be delivered into Boardwalk and MVP Pipelines to take that gas further east into Perryville and Transco. So, in Newfield those are heavily hedged. There is firm capacity so essentially we have improved the long-term economics for that gas in Southeast Oklahoma and again, they have pretty shift take a long-term view with their economics and they certainly are, Newfield is certainly continuing to ramp up their production in that area.

So, all in all, I am going to comment even though crisis had been very depressed and very volatile, we would not see a big change in our volume forecast because we offset an impact of the Granite Wash gas and the Woodford development both in Newfield.

Xin Liu - J.P. Morgan

Got you, that is helpful. In your Northeast, apparently you have negative gross margin in the fourth quarter, I was just wondering what the oil price realization for you is and for your NGLs because I thought you do not have ethane exposure in Northeast, right? So the fracs should be at least breakeven in Northeast region, is that correct?

Frank Semple

Go ahead, Randy.

Randy Nickerson

Sure. Xin, what we saw in the fourth quarter up in Appalachia, yes you are correct. We do not have ethane exposure there however we had a little bit of carryover first from some high gas purchase price. Again, we buy our gas if it goes there and some of that gas we purchased over the course of the summer that was associated with our hedges and it turns effectively into cost of our inventory, cost of good sold outside of the dynamic that was really one of the components driving to the negative frac spreads in the fourth quarter.

Frank Semple

So again, I am just continuing, if you look forward kind of looking forward in 2009, what we are experiencing now is a, the recovery [50.07] the correlation that we just mentioned earlier and more than obviously as a result of that, we are seeing much more positive frac spread in that large shift under those keep hole agreement. So it is through the first couple of months of 2009.

Xin Liu - J.P. Morgan

Okay and is there, are you planning to renegotiate the keep whole contract into probable fee in that region?

Frank Semple

That is not going to happen. We continue to have discussions about keep hole agreements and some of liquid agreements across the board and that is something that we talk about almost in every conference call and it is really is an important consideration but it is unlikely there will going to be able convert those keep hole agreement income soon and for those keep hole agreements.

So the key for us is that that we number one that we see a reversion to the correlations as we mentioned earlier and that we continue to take advantage of the forward commodity price curves and continue to hedge those keep hole agreements out of the long term. I do not think it is appropriate to get into the details of why it is going to be challenging to convert those agreements but we have had a lot of discussions and I just do not want to over promise and under deliver. It is going to be a real challenge over that.

Operator

Your next question comes from the line of Eric Kalamaras - Wachovia Capital Markets.

Eric Kalamaras - Wachovia Capital Markets

Question I guess around from the working capital. How do you see that going forward? Do you expect it to be represented of what we have seen perhaps this past quarter or how are you looking at that?

Frank Semple

With the capital markets?

Eric Kalamaras - Wachovia Capital Markets

No. Just specifically this thing about your general working capital uses.

Randy Nickerson

Yes, Eric I guess when I look at our working capital situation, it is a little tough to access. It is just on a pure basis because on the payable with the crude liability side, such a big portion of it has been attributable to our capital expenditure plan where it tends to skew a little bit to the negative on that side. The other is that we tend to manage our cash balances to a very low level and do so through the credit facility which is outside of that working capital calculation.

Eric Kalamaras - Wachovia Capital Markets

Okay, sure understood. I guess separately as it relates to Marcellus, going forward, will you be treating those volumes on a I guess, you will be reporting them on gross basis, was that right, or net of the transaction on the JV?

Randy Nickerson

Eric, we do not know ultimately whether we are going to be in an equity method or consolidation for the accounting treatment. We still got our accounting group working through that ultimate issue but I suspect that from a volume perspective, we will be reporting a 100% of the volume through in that portion of our earnings release in our financials to the extent we do stuff a little different in that. We will certainly make it clear as we disclose that going forward.

Eric Kalamaras - Wachovia Capital Markets

Okay, great and then Frank, if I can go back to your comment that you had made regarding the Woodford and Newfield, any sense as to if the existing differentials they continue and if the pricing continues the way it is, any sense or commentary you can offer around what Newfield may do as it relates to their drilling in the Woodford? How you made position the utilization of the asset going forward?

Frank Semple

Well again, I gave you a little bit of a perspective earlier and you really, I will just refer to their transcript. I think that they are very bullish on their program and it is not, certainly, it is in light of and taking into consideration the gas prices in the mid-continent but also based in a lot of time talking about their improvement in their cost structure, their F&D, their performance to the wells and also specifically as it relates to pricing, the ability to get to further east to their front capacity. Both those MVP and the Boardwalk pipelines, their ability to get their pricing if we look that from capacity and that is going to be coming on in 2009.

So, in the end I think it is just best to let their transcript speak for itself.

Eric Kalamaras - Wachovia Capital Markets

Okay, that is fair. Thanks Frank and then I guess similarly, as it relates to Range, they have got a very aggressive program as you have highlighted. Any sensitivities around the nature of the cash or the capital spending that you have to do, any sensitivities around that and as it relates to their drilling program and what limitations or I guess, what I am really trying to get at is, given what you have to do contractually in the Marcellus for the Range and given what you know that they are going to do, are there any changes or reductions in the capital program that could be going forward based on pricing? Is it a possibility that they have could based on where the price stock is they could reduce some of that activity? Are you getting conversations within or about that and what that might entail?

Frank Semple

Sure and I will let Randy discuss that because again, this issue is a very important consideration going forward because that is the, as I mentioned earlier with close Range that we are seeing and in our partner in the Marcellus, this issue around rightsizing or capital program is going forward. So, I will ask Randy to speak of that.

Randy Nickerson

Yes, two things I think are important. The first one is the real plug for Range. One of the things that guys we continue to benefit from, this really I think impressive about Range. Range is kind of set from the very beginning. They are going to be successful but in order to be successful; they have to make sure to ask other key service providers of theirs who are successful.

We are continually impressed about the partnership we have with Range and how willing Range has been to work with us to right size capital, timing and lots of things to not only meet their need but to meet our needs. And so they do a lot of stuff like if they were going to go out and explore new area that maybe is 3 or 4 miles away and that was going to take a lot of capital in our part to get out there and build a new compressor station, whatever, there is a lot of almost constant conversation about, "Geez, instead of doing that, why don't we move that well and go in that well? Let us drill a well that is right by your pipeline system." So, yes we will go up there and explore that next year, they can still have the same result but it has been an off lot less capital.

So, that is certainly one type of conservation that has been almost constant within and it has been a great, it has really been great part of partnership. It really has been a really good partnership and Range bends over backwards to make sure that we are an integral part of their decisions. They are still going to do what they need to be successful but they really do bend over backwards to make sure it is a team effort and that has been really a big deal.

The second part of that is there is a portion of those services, particularly downstream like fractionation and storage and NGO marketing, those sorts of things where we have some flexibility whether we build it up there now or we will build some of those, switch those avenues, some of our existing assets up there, one of the values that we bring having a franchise position already up in Appalachia. So that is the other thing that allowed both of us together to make sure we are rightsizing the capital along and of course we add M&R to the mix and it just gets better and we just add more and more flexibility between the three of us.

So, it really has worked out really, really well and yes, we do have capital commitments but boy, I could not ask for better partner than what Range has done in terms of being wise about spending our money and their money to match the market condition.

Frank Semple

And then just an add to that too, I think pretty obviously you get to a great extent to provide a lot of transparency and in our commitment to you is that we are going to continue to provide those updates on a quarterly basis. Our 2009 program for the partnership is on three sides. We have a lot of visibility in what those requirements are for Range and other producers. As you move in 2010, I think it is really critical. In every quarter through 2009, we provide that update on both how 2009 looks but also giving you some perspective into 2010 because it is such a strategic project and it does require capital.

Eric Kalamaras - Wachovia Capital Markets

Okay, great. I appreciate that. Thanks Randy for those comments. I guess just one last one that I would ask is Nancy, regarding the shale filing, no need for new capital at least as I see it going forward into rest of the 2009. Can you just comment about the expectations for the mid-shale filing?

Nancy Beuse

Yes, you are probably referring to the S-3 that we filed.

Eric Kalamaras - Wachovia Capital Markets

That is right.

Nancy Beuse

Yes, I will not get a lot of details but the SEC has kind of put a secure rules that in order to maintain your registration filing, you have to do a post effective amendment to get you buy for another review period. So this is sort of an amended approach. There is a kind of odd ruling that came out recently and we are just trying to do the right thing to stay active at our registration and avoid the lengthy review process.

Eric Kalamaras - Wachovia Capital Markets

Okay, so no expectation to do anything I guess is…

Nancy Beuse

No, it is just we want always as you know keep and stay prepared and have our registration in good status and as to that filing, it was just a methodology for keeping current.

Operator

Your next question comes from the line of Michael Blum - Wachovia Securities.

Michael Blum - Wachovia Securities

Just two quick questions; one, in the mid-continent, do you have any exposure to Chesapeake's announcement that they are going to be reducing their activities there and shutting well?

Randy Nickerson

We have very moderate exposure to Chesapeake really in the mid-continent or they talked about that. We still have a lot of exposure to the…

Frank Semple

Mike, if you remember they sold their positions or acreage in the Southeast Oklahoma where we had the majority of that business to BP.

Michael Blum - Wachovia Securities

Okay and second question; in terms of the $200 million that you are spending growth CapEx, is there any further discretion there in terms of ratcheting that back if we could be and I guess in light of that capital you are spending, can you talk about the decision to allocate the dollars there relative to decision not to exercise the option on MVP?

Frank Semple

Okay, the $200 million that we discussed in the capital program given Marcellus partnership CapEx, more than 50% of that CapEx is driven by the SMR and the completion of the Oklahoma connector and the rest of that CapEx that I mentioned earlier is essentially focused on East Texas, Southeast Oklahoma, Western Oklahoma. Those are the ongoing requirements for the piping compression to support the volumes in those areas. I would now categorize those discretionary per se but we certainly are, John Mollenkopf and his team is constantly spreading those numbers or the CapEx program to support this ongoing updates from the producers on their drilling program. So, yes I used that term right size and that is really critical now and we are going to continue to right size those projects and because they are incremental compression to provide additional support or increase volume, they typically have higher in terms of rate of returns.

Well I think the approximately $200 million as to put into numbers again we are going to provide quarterly updates on where we are and particularly the non SMR, non Arkoma connector component as we move forward into 2009.

As far as the how the CapEx program and our liquidity factors into the option MEP, our view is really not changed. We have not decided, yes, whether or not we are going to exercise that option but it is not on our capital program as an option. Again as we had the available capital and we felt like our cost of capital was supportive of that project and we would certainly love to participate. But it is not currently on our capital program but again, we will make that decision when the option becomes available to us and that basically after MEP starts up and we have the Arkoma connector in operation.

Operator

Your next question comes from the line of Teresa Fox - Stone Harbor.

Teresa Fox - Stone Harbor

Actually it has just been answered. Thank you.

Operator

Your next question comes from the line of Louis Shammy - Zimmer Lucas.

Louis Shammy - Zimmer Lucas

Thanks so much for the disclosure. Things are, was up there and pretty well. My question was regarding this quarter's result in Southeast Oklahoma. It seems like volumes have ramped up significantly and I am just wondering, looking into 2009 about how much growth are you expecting off of that on the Q4 level?

Randy Nickerson

We at the best guys, really is again I know Frank you have got before pointing back to Newfield by themselves. Their volumes are going about 30% and since they are the largest producer, I think it is safe to say that just in terms of volume growth, 2009 could be another year of, Louis, just like you pointed out significant volume growth. The good thing for us of course is that because so much of the backbones there, because so much of the gathering is there, we can really support pretty large increase within volume with just compression here and there. We already have enough a lot of compression so this system is built for large increases of volume with no little additions on our part.

Louis Shammy - Zimmer Lucas

And the other question I just wanted to confirm that so about $18 million of DCF has been lost in the monetizing those hedges?

Frank Semple

That is correct, yes in the first quarter.

Operator

Your last question comes from the line of Yves Siegel - Aroya Capital.

Yves Siegel - Aroya Capital

As it relates to the potential to do additional JV similar to what you did in the Marcellus, do you need, how close perhaps are you in consummating something like that and the follow up to that is do you also require amendments to your credit agreement or when you went in to get the, did you take care of it already I guess is the short way to ask that question.

Frank Semple

Okay, Yves, on the first part of your question. The fact that we have continue to reinforce the opportunity for an additional JV type transactions, we would say that we have had a lot of interest and we completed the Marcellus partnership within an hour as a part of a process. We put plug in from Morgan Stanley, they did a good job of helping to support that process and we came out of that process with a lot of market intelligence and a lot of interest in terms of potentially moving forward with additional transactions that could help improve our liquidity.

I am not going to project or forecast whether or not that those are going to be done or not. We have not assumed that in our plan that opportunities are there and we continue to have those discussions but there is a lot of interest there and what was the second part of the question?

Yves Siegel - Aroya Capital

I heard Randy whispered that. Just…

Frank Semple

I am sorry, what was really the second part of the question?

Yves Siegel - Aroya Capital

Whether you need approval or amendments.

Frank Semple

This is the structure, it happens pretty well. Things on the structure but they obviously were very sensitive to what will be required in our ventures and those kinds of things but we have recently amended credit facility so if we are going to do something, we expect a big consideration for us and it is a part of our analysis and our discussion as far as some of the structural approaches that we might take on several of these opportunities. I know we are being a little bit of vague here but it is just really important to understand that we feel that there ought to be some credibility in what we have just done. We are now in a very difficult market and it really develops partnership that I think somewhat will make and we think we had good partner and good discussions on it on a go-forward basis that we are their opportunities that have been positive I think because we were kind of blessed because we did not go out and pay for a lot of our assets in the past. We have developed projects that had good economics and they are attractive. So the biggest question is whether or not we are going to need that liquidity and what type of structure works for both us and potential partner and with our banks.

Operator

I will now turn the call over to Frank Semple for closing remarks.

Frank Semple

Well, thanks a lot and again I want to thank everybody for joining us in the conference call today. That completes our formal remarks and we do appreciate all your interest and your questions and your continued support. So, again if you have any additional questions, please give us a call. Thanks a lot.

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Source: MarkWest Energy Partners LP Q4 2008 Earnings Call Transcript
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