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Executives

Frank Semple - Chairman, President & Chief Executive Officer

Nancy Buese - Chief Financial Officer

Randy Nickerson - Chief Commercial Officer

Andy Schroeder - Vice President of Finance

Dan Campbell - Treasurer of Investor Relations

Analysts

John Edwards - Morgan Keegan

Patrick Walsh - Neuberger Berman

MarkWest Energy Partners L.P. (MWE) Q3 2009 Earnings Call November 10, 2009 4:00 PM ET

Operator

Welcome to the MarkWest Energy Partners third quarter earnings conference call. Your lines have been placed on listen-only, until the question-and-session of today’s conference.

I will now turn the call over to Dan Campbell. Thank you, sir. You may begin.

Dan Campbell

Thank you, Mary and welcome to those who joined us on the call. Our comments today will include forward-looking statements, which involve risks and uncertainties and are not guarantees of future performance. Actual results could vary 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 their 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”.

With that, I’ll turn the call over to Frank Semple, our Chairman, President and CEO.

Frank Semple

Thanks, Dan. Good afternoon and thanks for joining us on the call. Joining me today are Nancy Buese, our Chief Financial Officer; Randy Nickerson, our Chief Commercial Officer; John Mollenkopf, our Chief Operations Officer; and Andy Schroeder, Vice President of Finance.

Our core assets continue to perform well and in 2009, we have executed a financing plan that provide sufficient liquidity and balance sheet strength to support our quality side of growth projects in some of the most economic resource plays in the U.S. During the call today, I’m going to first review our financial performance followed by a brief update on our growth projects, our balance sheet status and our guidance for 2009 and 2010 and as usual, we will reserve plenty of time for your questions.

As indicated in our press release, distributable cash flow for the third quarter was $40 million adjusted EBITDA was $60 million and segment operating income was $83 million. For the first nine months of the year DCF was $129 million, adjusted EBITDA was $202 million and segment operating income was $204 million.

The 2009 financial results were lower than in the same periods of 2008, when commodity prices reached record highs and the decrease was driven almost entirely by the significant year-over-year decline in commodity prices. Nevertheless, we maintained our $0.64 per unit distribution with a coverage ratio for the third quarter of 0.95 times and 1.1 times for the first nine months of the year.

Our decision to raise equity capital in the third quarter impacted our distribution coverage for the third quarter. However, the incremental liquidity is funding high quality midstream projects that will drive higher volumes in our core operating areas and will further strengthen our market presence in and cash flow from long term economic resource plays.

Our overall system gathering throughput, processing volumes and natural gas liquids production have increased significantly over the last year, primarily as a result of new projects coming online and our Oklahoma, East Texas and Appalachian operations, which includes both other legacy assets in Kentucky and West Virginia and Liberty joint venture in the Marcellus.

We remain very committed to our rolling 36 month hedging program to manage the risk associated with commodity price exposure and to meet our distribution objectives. We are approximately 70% hedged in 2010, 40% hedged in 2011, and 30% hedged in 2012 using both crude oil proxy and direct NGL product hedges. We continue to optimistically take advantages of the attractive four market locking strong margins and secure a large percentage of our distributable cash flow for the next three years.

Now, let me shift gears and talk about the high quality projects that are being developed around our core operations. Recently MarkWest had the opportunity to speak to at a number of conferences regarding the development of unconventional natural gas production. There are two comment themes that dominate the discussions. The first theme is there a significant advantage in the finding and development costs for these new plays compared to traditional reservoirs.

What this means is that the development of traditional reservoirs will likely slow and a lion’s share of new investment will be focused more heavily on the development of large emerging resource plays. The second common theme is that significant investments will be required to develop the large scale midstream infrastructure required to efficiently support the production characteristics and the rapid growth of these emerging resource plays, because these two overarching themes have such an important impact on natural gas production in the US.

I think it’s worth the taking a few minutes to talk about how they have impacted the MarkWest strategy. The combination of low gas prices and the emergence of the Haynesville, Marcellus, Granite Wash and others have placed a spotlight on resource plays over the last year. Yet MarkWest has been focusing on these areas for well over three years. In fact, more than 75% of the $1.4 billion we have invested over the past three years have been related to preparing for and supporting the growth of the emerging resource plays.

Remember this was at a time when acquisitions of midstream assets and traditional basins were occurring at an unprecedented rate. For example, in Southeast Oklahoma in the Woodford Shale, we have invested over $450 million since 2006 to create a significant gathering backbone in what is now widely considered to be an important resource play.

We also entered into a processing joint venture and recently completed the Arkoma Connector Pipeline to transport gas south out of the Woodford to the MEP and Gulf Crossing pipelines. We are currently operating very near the 500 million cubic feet per day gathering capacity to support more than 200,000 acres that are dedicated our Woodford system, which can easily be expanded to meet growing producer requirements.

In East Texas we have served the Cotton Valley, Travis Peak and Pettit formations for a number of years. In currently we are gathering more than 30 million cubic feet per day of Haynesville gas. Our highly efficient gathering systems in processing plans overly more than 220,000 dedicated acres of core Haynesville Shale, which allowed us to provide a immediate midstream services to several large Haynesville players with minimal incremental capital.

When combined with the continued development of the Prolific Cotton Valley Reservoir our East Texas volumes have the potential for dramatic growth over the next several years. We want to talk a lot about our Appleby system that is located in Nacogdoches County, South of our East Texas operation, but if two have significant Haynesville potential and it is right in the middle of the emerging Bossier Shale. Last year we invested capital in our Appleby system to support the producer development of these significant new plays.

Perhaps the area with the most compelling producer economics in the U.S. is the Granite Wash in the Texas Panhandle. In late 2008 and early 2009 we invested over $100 million to upgrade our Western Oklahoma operations and to expand into Texas to support new field explorations significant drilling active in the Granite Wash. As a result of new field success we are expanding gathering system, increasing compression and adding new takeaway capacity.

We are currently gathering almost 100 million cubic feet per day and based on new fields announced performances and results from their as a range drilling program we expect that these volumes will continue to grow as they develop their acreage and of course the emerging resource play that everyone including MarkWest believes is changing the face of natural gas production in the U.S. is the Marcellus.

Several weeks ago we attended Hart’s conference and was incredible to see more than 1300 people attend an early Monday morning conference in Pittsburgh. We were the only pure midstream player to speak at the conference and it was great to share the spotlight with companies like range Chesapeake, CNX and EQT.

Since the mid 2008 we have installed nearly 70 miles of high pressure and low pressure gathering lines in the prolific wet area in Southwest Pennsylvania and we commenced operations on two new gas processing plants. Today, we have the largest gatherer and processor supporting horizontal drilling in the Marcellus with current volumes at approximately 85 million cubic feet per day that are expected to grow to 100 million cubic feet a day by year end and approximately 200 million per day by the end of 2010.

Our current gathering and processing capacity in the Marcellus is supporting the significant and very successful range resources drilling program and by the end of the year, we are bringing online a new 120 million cubic feet a day cryogenic gas plant to support their continued expansion. Also, in order to support our recently announced agreement with Chesapeake and other producers, we are in the process of designing and building two additional gas processing plants and our largest new NGL fractionation and logistics complex in the Northeastern United States.

In short, our first move to our advantage combined with our legacy assets in the Northeast including our Siloam fractionation complex has put us in a strong position as a premier mid-stream provider that offers comprehensive NGL fractionation, storage and marketing services that are so critical to support the producers operations in the wet area of the Marcellus.

One of the key presentations at plats Marcellus conference two weeks ago was given by E&P Geologist Dr. Jack Ward. Dr. Ward completed an exhaustive independent analysis of the geologic characteristics of the Marcellus formation in order to locate the most prospective acreage. We were pleased although not surprised when Dr. Ward concluded that the Southwestern Pennsylvania area, where we have approximately 300,000 acres dedicated to our system is the most prospective part of the Marcellus.

One of our best decisions this year was to partner with NGP Midstream and Resources in the Marcellus. M&R is a significant source of capital and bring a wealth of deep industry experience. They are a strategic long term partner, which is a great asset to have as we ramp up our assets in order to serve our producer customers in these large resource plays. I also want to mention that our joint efforts with Columbia Gas Transmission continue to bear fruit and we are excited to work with them to leverage our respective assets in the Appalachian Basin.

Our investments over the last three years and a major emerging resource plays are the result of a commitment to meet our customer’s requirements and to prepare for the wave of significant volume growth from the producers’ aggressive drilling activity. We have been winding the spring if you will, since late 2006 and will continue to do so throughout 2010. As the spring unwinds, we believe we will be in a great position to provide strong distribution growth and returns for unit holders for many years to come.

Shifting now to our balance sheet, at quarter end we had total available liquidity of nearly $420 million between cash on hand and available capacity on our revolving credit facility. We have a consistent and measured approach to managing our balance sheet and to opportunistically pre-signed our growth capital while maintaining a cushion around our bank covenants and distribution coverage objectives. This year, we have executed a multifaceted financing strategy to strengthen our liquidity position and to support our capital program including an increase to our resolving credit facility.

Two joint ventures; two public equity offerings and one private placement of senior unsecured notes in addition, in September we sold of steam methane reformer, which is under construction at our Javelina facility. We used the net proceeds from these activities to repay borrowings under our resolving credit facility and to fund our capital program. Even with our significant capital spending in the first nine months of the year, we were effectively un-borrowed on our revolver at the end of the quarter. This puts us in a strong position to fund our planned capital program for the remainder of 2009 and 2010.

Our total debt at quarter end was $1.2 billion comprised primarily of senior notes in trenches with the earliest trench due in 2014. For the third quarter, our debt-to-total capital was 50%; our leverage ratio was 4.3 times, and our interest coverage ratio was 3.3 times. These two ratios are calculated in accordance with our credit agreement and included an EBITDA adjustment for material projects; and before concluding, I want to briefly discuss our 2009 and 2010 guidance.

For 2009, we narrowed our DCF guidance to a range of $170 million to $180 million based on refinements to our full year forecast. The midpoint of this range provides distribution coverage of 1.1 times for the full year at our currents annualized distribution rate.

Our 2009 growth capital forecast is $465 million of which approximately $310 million will be funded through capital contributions from our joint venture partners and proceeds from the sale of the SMR facility. As a result, our share of growth capital expenditures for 2009 is approximately $155 million.

For 2010 we’re forecasting DCF in the range of $170 million to $210 million. The forecast assumes the current forward prices for crude oil and natural gas and reflects our best estimates of gathering and processing volumes from working closely with our producer customers to understand their drilling programs.

In an effort to provide as much transparency as possible, we included in the press release a sensitivity table that shows the impact of 2010 DCF of various crude and natural gas prices as well as NGL correlations. Our initial forecast of our 2010 capital program is approximately $480 million of which we expect approximately $180 million will be funded through capital contributions from our joint venture partners. This capital program is driven primarily by high quality largely fee based projects in our core operations.

So to summarize our call today, our core operations are located in some of the best resource plays in the U.S. and we are very well positioned to continue capturing incremental volumes and cash flow. Looking forward, we will continue to focus on our key priorities of providing quality midstream services for our customers, maintaining a strong balance sheet and achieving our distribution objectives.

So with that, let’s turn now to our questions. Mary.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Edwards - Morgan Keegan.

.

John Edwards - Morgan Keegan

Frank, could you talk a little bit about what you see longer term the midstream investment opportunity over the next two to three years? I guess what share you expect MarkWest to be able to capture on that?

Frank Semple

John, are you speaking about any specific area?

John Edwards - Morgan Keegan

Marcellus Shale.

Frank Semple

John, obviously we’re very pleased with our first move for advantage as I mentioned in the call. There has been certainly a lot of focus across the Marcellus primarily in Pennsylvania. Now in West Virginia and certainly moving up into the Northeast, but the majority of the investments that are going on right now are down in the wet area in the Greene and Washington area.

The capital that we now provided guidance for in 2010 reflects pretty clear line aside on the types of facilities that need to be in place in order to support the drilling programs of range and Chesapeake and the other producers that we are working with in that area.

As far as the overall capital that’s going to be required to support the Marcellus drilling activities. Again, there’s going to be billion of dollars required in order to support those drilling programs. It’s an enormous play with obviously now very good economics and a lot of interest and a lot of acreage being committed to that play.

Our goal really is to stay focused on our key customers up there and to make sure we don’t get ahead of ourselves. So that’s why you see the large majority of our assets really being centered around that wet area. We believe that we could continue to maintain a very strong market share in that area.

John Edwards - Morgan Keegan

You say multiple billions. I mean what do you think your share would be of $1 billion over the next three years? Would that be a fair assumption or what’s your thought on that?

Frank Semple

We obviously look at our capital plan over a five year period. So we go out pretty far and that capital program is based on our work with our producer customers and we’re pretty committed to stay ahead of the opportunities particularly in that wet area of the Marcellus. I’m not going to venture a guess as to what that five year plan looks like, but if you just look and listen to the earnings calls in the earnings releases from the major producers in the Marcellus, you start to get an idea of what they are planning in terms of rig count and production in their acreage.

If you think about what we’ve been able to develop over the next several years, where we are today and what we have planned, as I mentioned in my remarks earlier, what we had planned over the next several years I think you could expect us to kind of replicate what we’re doing in 2009 and 2010 in order to stay in front of the producers, because particularly in this wet area.

I think the characterization is a Shale wave or a wave of facilities that are necessary to stay in front of the Shale development is really true. It takes a lot of focus and a lot of capital, but the results are spectacular when you think about the performance of the wells and the economics of the production. So we will continue to spend a significant amount of capital over the next three, four, five years in order to support our producers.

John Edwards - Morgan Keegan

Then just one last one then as far as your capital budget goes, can you say approximately what percentage of your incremental spending you’re expecting to go to support the Marcellus play? I mean is it virtually all of it? Is it a lower percentage?

Frank Semple

Well, it’s called the lion’s share. I think fairly I think we’re safer to say that better than 80% of the capital for the Marcellus. That’s on a gross basis. So if you take the net, there’s a net from the capital contributions in the Marcellus in our Liberty operations from M&R, it’s probably a little bit less than that, but looking on the table here’s there a number there on the net basis, 75% on a net basis.

Operator

Your final question comes from Patrick Walsh - Neuberger Berman.

Patrick Walsh - Neuberger Berman

My first question is with your liquidity where it is right now, is it kind of safe to say that, you wouldn’t need any capital markets that or equity in next six to nine months, maybe even 12, depending on if your current kind of budget plans out?

Nancy Buese

As we’ve done historically, we typically try to pre-fund for capital requirements and given everything that’s occurred in 2009. We are pre-funded going into 2010 and do not need to access the capital markets. Again, we have opportunistically access from a historical basis, but at this point in time, we do not need to go to the markets in 2010.

Patrick Walsh - Neuberger Berman

Quickly, second your format on your 10-Q, specifically like the cash flow and you guys have kind of changed and slimmed down the cash flow statement and balance sheet. Is there any plan to go back to the format that was a little more informative I’d say in the first quarter of this year?

Nancy Buese

We’ve had a question come up before, we did move to condensed financial statements, just because our Qs were getting so lengthy. We have not committed to going back to the long form of disclosure for the 10-K. If there’s anything you feel like you’re missing definitely let us know. We’ll provide that data, but at this point in time we would plan to stay with the condensed format.

Operator

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

Frank Semple

Well, Mary thanks a lot for your support today. I’d just like to end by saying we appreciate your continued support and your interest in MarkWest and as always please call if you’ve got any additional questions. Thanks a lot for your time.

Operator

The call has ended. You may disconnect at this time. Thank you.

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Source: MarkWest Energy Partners LP Q3 2009 Earnings Call Transcript
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