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Executives

Randy S. Nickerson - Chief Commercial Officer of MarkWest Energy GP L.L.C and Senior Vice President of MarkWest Energy GP L L C

Frank M. Semple - Chairman of the Board of MarkWest Energy GP LLC, Chief Executive Officer of MarkWest Energy GP LLC, President of MarkWest Energy GP LLC, Chief Executive Officer of MarkWest Hydrocarbon and President of MarkWest Hydrocarbon

Dan Campbell - Vice President of Finance - Markwest Energy Gp Llc and Treasurer of Markwest Energy Gp, L.L.C

Nancy K. Buese - Chief Financial Officer of Markwest Energy Gp LLC, Chief Accounting Officer of Markwest Energy Gp LLC, Senior Vice President of Markwest Energy Gp L L C and Chief Accounting Officer of Markwest Hydrocarbonz

Analysts

John K. Tysseland - Citigroup Inc, Research Division

John D. Edwards - Morgan Keegan & Company, Inc., Research Division

TJ Schultz - RBC Capital Markets, LLC, Research Division

Louis Shamie - Zimmer Lucas

MarkWest Energy Partners LP (MWE) Q3 2011 Earnings Call November 8, 2011 4:00 PM ET

Operator

Good afternoon. Welcome to the MarkWest Energy Partners Third Quarter 2011 Earnings Conference Call. [Operator Instructions] This call is being recorded. If you have any objections, please disconnect at this time. I would now turn the call over to Dan Campbell. Thank you, sir. You may begin.

Dan Campbell

Thank you, Sarah, and welcome to everyone who has joined us today on the call. Our comments will include forward-looking statements, which involve risks and uncertainties that are not guarantees of future performance. Actual results could vary significantly from those expressed or implied in such statements. And 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 that we file with the SEC. We encourage you to carefully review and consider the cautionary statements and other disclosures made in those filings, particularly those under the heading Risk Factors.

And with that, I'll turn the call over to Frank Semple, our Chairman, President and CEO.

Frank M. Semple

Good afternoon, and thanks to everyone for joining us on the call today. As indicated in our earnings release, we had another outstanding quarter, and we continue to experience significant growth and strong financial performance from our diverse set of high-quality midstream assets. Over the past 3 quarters, we have begun to see the significant ramp-up in cash flow and distribution growth, which is the result of more than $2 billion of strategic investments made over the past few years. These investments have provided the critical infrastructure required by our producer customers to develop their liquids-rich acreage in some of the best resource plays in the U.S.

We also continue to strengthen our balance sheet and liquidity in our integrate position to continue to pursue additional growth opportunities.

During the call today, I'll discuss our financial performance, provide a commercial and operational update, review our balance sheet and recent capital market transactions and discuss our DCF guidance and capital forecast. We'll then respond to your questions.

Beginning with a high-level overview of our financial performance, we achieved record distributable cash flow of $85 million during the third quarter, an increase of 57% compared to the third quarter last year. Adjusted EBITDA was $107 million, and segment operating income was $148 million. DCF per unit for the third quarter increased 41% compared to the prior quarter, and in October, we announced a third quarter distribution of $0.73 per common unit, an increase of more than 14% compared to the third quarter of 2010, while maintaining a strong distribution coverage ratio of 1.38x. This is a remarkable increase in DCF and DCF per unit, which is in large part, a reflection of our significant and strategic investments over the past several years.

Moving to the operational update. Let me begin with our Southwest business unit, which contributed nearly 55% of our total segment operating income in the third quarter. Our gathered volumes in Western Oklahoma increased 31% compared to last year as our producer customers continue to drill high-performing hydrocarbon-rich wells in the Granite Wash, one of the most economic resource plays in the U.S. In order to support this growth in liquids-rich volumes for the Granite Wash, we recently commissioned a 75 million cubic feet per day expansion at our Arapaho processing complex. This expansion brings our total processing capacity in Western Oklahoma to 235 million cubic feet per day.

In Southeast Oklahoma, our gathered volumes remain strong at 500 million cubic feet per day, and our processed volumes year-to-date are greater than 100 million cubic feet per day. The volume of gas that we processed in Southeast Oklahoma increased by more than 30% compared to the same period last year and provides a healthy uplift in margin for both MarkWest and our producer customers.

In East Texas, gathered and processed volumes from the Haynesville and Cotton Valley behind our Carthage system were fairly flat. However, given the increase in liquids-rich production that our customers are forecasting, we are currently evaluating an additional expansion of our cryogenic processing capacity in East Texas. We had a reputation for providing exceptional customer service in all our operating areas, and we continue to be ideally positioned to further expand our presence in the Southwest and Gulf Coast segments.

Let's move now to our Appalachian operations, where we have 2 business segments, the Northeast and Liberty. As you know, we have been the largest processor and fractionator in the northeast United States for more than 20 years, and we continue to significantly strengthen our leadership position in this critical growth area. Today, on a combined basis, our Northeast and Liberty segments have processing capacity in excess of 1 billion cubic feet per day and fractionation capacity of nearly 85,000 barrels per day, essentially all of which is supported by long-term high-quality contracts. Equally important is our pipeline network that delivers NGLs to our fractionation complexes in Kentucky and Pennsylvania. These assets allow us to leverage our significant marketing expertise in the Northeast to transport, store and market NGLs through our extensive rail truck, barge and pipeline infrastructure.

Looking ahead, when you factor in the processing and fractionation projects that we have announced and are currently under construction, by mid-2013, we will have total processing capacity in Appalachia of nearly 1.8 billion cubic feet per day and fractionation capacity of 160,000 barrels per day, including the capacity to produce 75,000 barrels per day of purity ethane at our Houston and Majorsville complexes. To put this growth in perspective, before we started construction in the Marcellus in early 2008, we had processing capacity of approximately 330 million cubic feet per day and fractionation capacity of just 16,000 barrels per day. Appalachia is where MarkWest started almost 25 years ago, and it's exciting to be a part of the Marcellus development, which is creating tremendous economic benefits and thousands of jobs in Pennsylvania and West Virginia.

Our long-term vision for Appalachia continues to be the creation of an integrated full-service gas processing and NGL gathering and fractionation system that supports liquids-rich production extending from the Huron/Berea Shale in Southern Kentucky to the Marcellus Shale in Northern West Virginia and Western Pennsylvania. We're currently operating 10 processing plants and 2 fractionation complexes throughout Appalachia and we have a long history of constructing and operating the integrated pipeline processing and NGL fractionation facilities that are required to support the dramatic increase in the shale development by our producer customers. Connecting our Huron and Marcellus NGL infrastructure would create enormous reliability and flexibility for Appalachian producers and could also provide an attractive option for producers in the Utica Shale, which is on the verge of explosive growth.

In the Northeast segment, our year-to-date gathered, process and fractionated volumes remain strong as producers continue their drilling programs primarily in the Huron. We have fully integrated the Langley acquisition that we completed early this year. And we're currently increasing the processing capacity by 150 million cubic feet per day, bringing our total capacity at Langley to 325 million cubic feet per day. This expansion is expected to come online in the second half of 2012. In addition, during the fourth quarter, we expect to complete the Ranger NGL pipeline, which will allow us to transport via pipeline to Siloam, Kentucky all the NGLs that are produced at the Langley complex and eliminate the current trucking costs for both MarkWest and our customers.

In the Liberty segment, which is our Marcellus joint venture with The Energy & Minerals Group, we continue to see significant volume growth compared to last year, with gathered volumes increasing by nearly 70%, processed volumes increasing by more than 130% and fractionated volumes increasing by nearly 200%. Today, we operate an extensive and a continuously expanding gathering system, 625 million cubic feet per day of processing capacity and a fractionator with designed capacity of 60,000 barrels per day.

We continue to execute on a large number of projects critical to the full development of the liquids-rich Marcellus acreage in Western Pennsylvania and Northern West Virginia. Our current projects include the construction of 4 additional processing plants in West Virginia, 2 large deethanization facilities in Majorsville and Houston, 200 miles of gas gathering, NGL and purity ethane pipelines in West Virginia and Pennsylvania, and a 200-car rail facility at our Houston complex. All of these projects significantly expand the scale of our midstream infrastructure in the heart of the prolific Northeast shale plays. When these projects are completed by mid- 2013, our processing capacity will increase to more than 1.3 billion cubic feet per day and our fractionation capacity will increase to more than 135,000 barrels per day. Given the quality and compelling economics of the Marcellus Shale and ongoing discussions with our customers, we anticipate significant additional growth in our producer volumes and our midstream assets for years to come.

Before completing the discussion of our Liberty operations, let me make a few comments about the Mariner ethane projects, which we are jointly developing with Sunoco Logistics. MarkWest has been a leader in developing solutions to support our producers in the Northeast, and with our existing NGL infrastructure and the completion of our ethane transportation and fractionation facilities, our Houston, Pennsylvania complex will be the primary supply source for all of the currently announced Marcellus ethane projects. Mariner West is the only Marcellus ethane pipeline project that is supported by definitive agreements and is currently under construction. We will have initial capacity to transport up to 50,000 barrels per day to the Sarnia markets by mid-2013. This project will be critical to support the continued growth of liquids-rich production in the Marcellus and the execution of firm transportation agreements in the third quarter as a significant milestone for MarkWest, Sunoco Logistics and our producer customers.

Mariner East is a pipeline in Marine project designed to transport 50,000 barrels per day of Marcellus ethane to premium Gulf Coast and international markets in 2013. As with Mariner West, Mariner East will be operated by Sunoco Logistics, and we are actively working with the producers and ethane consumers to complete the agreements to move forward with this project.

Ethane is an increasing valuable feedstock for petrochemical plants around the world, which is driving a significant increase in demand. We continue to work with our producer customers to support all Marcellus ethane transportation solutions, including the recently announced Enterprise pipeline project to the Gulf Coast, which would connect to our Houston, Pennsylvania facility.

Now turning to our financials. The balance sheet continues to be a key area of focus for us, and we have been very active in the capital markets this year to support our significant organic growth program. Earlier this year, we achieved a significant milestone when we received upgrades to BB from both Moody's and S&P, which was a key driver in the recent completion of a $700 million senior note offering at a $6.25% coupon. Year-to-date, we have completed 3 senior note offerings and 3 equity offerings for total net proceeds of nearly $1.8 billion. These transactions will result in significant interest expense savings of more than 200 basis points, and the majority of our senior notes have been extended to 2020 or beyond. We also amended the terms of our $750 million credit facility to lower our borrowing costs by 75 basis points and to extend the maturity of the facility to late 2016. Today, we have available liquidity of approximately $1.5 billion to fund our capital program and to support the current tender offer for the outstanding $334 million balance of our 8 3/4 2018 notes, which would further reduce the weighted average cost of debt. As of September 30, our debt to total capital was 44%, our leverage ratio was 3.2x and our interest coverage ratio was a healthy 4.3x.

Given our distribution objectives and the variability of the forward markets, we continue to consistently hedge our future commodity positions. We are essentially fully hedged for 2011 and 2012. And for 2013 and 2014, we are hedged at approximately 50% and 20%, respectively. The majority of our hedged transactions have been executed utilizing crude oil swaps that range from approximately $85 to more than $100. We have also taken advantage of strong forward markets to execute a number of direct product hedges through 2014 at very favorable prices. This hedging philosophy has served us well and continues to be a key priority for MarkWest given our long-term distribution objectives.

Before concluding, I want to briefly discuss our guidance for the remainder of 2011 and our initial guidance for 2012. We increased our 2011 DCF guidance to a range of $325 million to $345 million. The midpoint of our 2011 DCF guidance results in 40% year-over-year growth in DCF and 20% growth in DCF per unit at our current distribution and unit outstanding, including the 5.8 million units we issued in October. Our 2011 capital forecast remains unchanged in the range of $675 million to $700 million.

This strong financial performance is a direct result of the $2 billion of high-quality strategic investments since 2002 -- 2008. We are now realizing the financial benefits from these investments and we still have a large inventory of high-quality projects scheduled for the next several years in Appalachia as well as our Southwest business segment. The consistent growth in DCF from these recently completed projects, coupled with forecasted NGL prices and processing margins, supports our initial 2012 DCF forecast in a range of $380 million to $440 million. The midpoint of our 2012 DCF guidance results in a year-over-year DCF growth of more than 20% and DCF per unit growth of approximately 15%.

The coverage ratio in 2012 and our current distribution and units outstanding would be more than 1.6x for the full year, which gives us plenty of room to continue growing our distributions and delivering top quartile total returns for our unitholders. We included in our press release, the usual sensitivity table that shows projected 2012 DCF based on a range of crude and natural gas prices.

Our current capital forecast for 2012 is between $600 million and $700 million, which will fund a diverse set of largely fee-based midstream projects, the vast majority of which are fully contracted and announced.

So in summary, 2011 is on track to be another record year, and our current forecast for 2012 shows that we are not laying off the gas anytime soon. With our diverse set of assets in growing resource plays, we are very well positioned to continue developing efficient and effective midstream solutions for our producer customers. These growth opportunities, coupled with the strength of our balance sheet, continue to support our objective to provide superior and sustainable total returns for our unitholders.

So with that, Sarah, let's open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question is from John Tysseland, Citigroup.

John K. Tysseland - Citigroup Inc, Research Division

In terms of your expectations on producer activity out of the Marcellus following the Mariner West project coming online, which obviously will provide an outlet for ethane in the region, have you had conversations with producers that would indicate any potential ramp-up in activity once that is a solution there? And are they giving you any kind of indication that they might be more willing to drill or accelerate drilling activity once that is solved?

Frank M. Semple

Yes, John, this is Frank. Let me just start by saying that the -- we've worked really hard with our producer customers and the ethane markets to ensure that there's not a bottleneck. We have -- we are developing projects that include the deethanization at Majorsville and Houston and the pipeline project, Mariner West, and Mariner East that I mentioned and then also the Enterprise project, to ensure that there aren't any bottlenecks. So I think if you ask the producers that question, they are not managing their drilling program based on any kind of ethane constraints. And that's been really key, and this is not just a situation that's curdled over the last 6 months or year. I mean, for the last 2 or 3 years, we've been working really closely with producers to ensure that we have multiple solutions for them. So back to your question, their drilling programs are really being developed based on the economics of the play.

John K. Tysseland - Citigroup Inc, Research Division

I guess the origin of the question is kind of looking at the Northwest PA ramp-up in the dry gas region that's accelerated almost like a hockey stick and the Southeast portion of PA has done well also but it's sort of lagged Northwest and I guess the question would be, does -- once you get a large piece of ethane takeaway capacity out, do you see the development of Southeast kind of more in line with the Northeast -- I mean, Northwest?

Frank M. Semple

Yes, I understand the question, John, and Randy, I think, wants to add a little bit to what I was mentioning.

Randy S. Nickerson

Yes, when mostly we talked about -- remember, for the early years when people talked about the Southwest PA in the constraints, the constraints were rarely, if ever, related to ethane or a lot of constraints on Gavin [ph] but really those processing plants sort of were constrained and fractionation. So when people talk about constraints, that's generally what they would talk about. At this point, we have, certainly have the facilities to be well ahead of and certainly stay with and be ahead of our producers. And so, I can -- once that -- now that those constraints are all gone, you could see some ramp-up, but I don't think that, at this point, they're really having any constraints or holding back compared to what was done in the sort of Northeast part of the play.

John K. Tysseland - Citigroup Inc, Research Division

Okay, it's fair enough. And then on the derivative loss for the quarter, that came in a little bit more than what we had expected. Operations came in better than expected, but the derivative loss was a little bit more. Is the -- is there anything that we should look to for the fourth quarter to -- as a benchmark versus this quarter, where that derivative loss will come in a little bit lower? Or is the pricing regime today or environment today kind of going to be similar of where we should expect a similar derivative loss in the fourth?

Frank M. Semple

Well, what you're seeing is -- in the first 3 quarters, John, you're seeing the roll-off, if you will, of existing hedged transactions that are reported in our Q. And if you just assume that the forward curve continues to increase, then you would expect those losses to decrease in the fourth quarter. But I think the best way to model that would be to think about our -- the point that I made earlier that the majority of our -- the large majority of our existing proxy hedges are between $85 and $100. So again, if you just kind of compare that to our -- if you look at the Q, I think it will give you a pretty good understanding about what our -- the Q is going to be a pretty good proxy for what the fourth quarter results will be for hedged settlements.

John K. Tysseland - Citigroup Inc, Research Division

Just to clarify though, it's -- so the fourth quarter, you might experience that the hedging environment or the hedge that you have on for the fourth quarter might be a little bit more favorable than third, is that a fair way to ballpark it?

Frank M. Semple

A little bit more favorable compared to the fourth, that first 3 quarters of the year.

Operator

Our next question, from TJ Schultz, RBC Capital Markets.

TJ Schultz - RBC Capital Markets, LLC, Research Division

Just a couple of questions. On Mariner West, I guess the initial capacity, up to 50,000 barrels a day, what is the expansion opportunity on that and kind of the gating factors to increase capacity on Mariner West and thought process on timeline for potential increase in the capacity there?

Randy S. Nickerson

Yes, this is Randy Nickerson. I'll take this one. In some of this, we want to be a little bit careful because a lot of the expansion really would occur along the Sunoco Logistics line, so because of Sunoco Logistics-operated project, we'll sort of answer briefly but for them, but they're sort of the operator and the experts. What we've talked about with them is that we can fairly, cost-effectively and quickly, or they can, expand that say in the range of 65,000 barrels -- to the range of 65,000 barrels a day, but large expansions past that will take a little bit more work, and they're certainly working on those, but that's the discussions that we've had to date.

Frank M. Semple

Just to add to that, and I think we have and we said in previous calls related to the Mariner West project is that you have a fair -- it's really -- it's obviously a market-driven issue and you have a fairly finite market up in Sarnia. So I think that, as Randy said, there's flexibility to increase the physical pipeline capacity but the issue is going to be what additional capacity or demand is going to be driven by the Sarnia markets.

TJ Schultz - RBC Capital Markets, LLC, Research Division

Okay. And I guess moving to Mariner East. Given the proposed pipeline solution to the Gulf, I know you're still -- you've mentioned you're still in discussions with producers and ethane customers on Mariner East, just curious how the pipeline solution may have impacted some of those discussions or kind of your current view on that project in light of the pipe?

Frank M. Semple

Well, TJ, I assume you're talking about the impact on Mariner East by the Enterprise open season?

TJ Schultz - RBC Capital Markets, LLC, Research Division

Correct.

Frank M. Semple

Okay. Well, it really it hasn't impacted Mariner East at all. I mean, our focus has been to continue to develop ethane solutions for our producer customers up there, and Mariner East continues to be a very interesting project and obviously, it has different characteristics, has different timing, it has different pricing and different markets, so the producers continue to be very interested in us continuing to push forward on the development of that project, and that's our goal. I think if you just look at the international markets alone, the ability to have the flexibility on -- over in Philadelphia to be able to put ethane on barges to international markets is very intriguing. That coupled with the fact that the ethane, the ocean-going barges would land the ethane to different points along the Gulf Coast so you just -- it's such a very different project and so it's -- we feel like it's very important for us to continue to move forward aggressively with the -- working through the agreements that are going to be necessary to fully develop that project just as we -- just as it was with Mariner West.

Operator

Our next question, from John Edwards, Morgan Keegan.

John D. Edwards - Morgan Keegan & Company, Inc., Research Division

Hey, Frank, could you comment -- just following-up TJ's question, is it your view that there's room for both the Enterprise-proposed project as well as Mariner East?

Frank M. Semple

Absolutely. Absolutely. The more outlets for ethane out of the Marcellus in the Utica, the better. So yes, absolutely. Yes, there's -- ethane is just becoming an increasing valuable commodity in the world markets, and it's important to create as many options for the producers. And again, John, as you know, this has been our attitude for many years since we've been in the Marcellus. I mean, we've strived, we've envisioned and plan for the need for valuable outlets for all of the NGLs, including ethane, from the very start. So the fact that Enterprise is moved forward with their open season, that they have the current agreement, if you will, with Chesapeake for the initial tranche of ethane on their pipeline, I think, is a good thing for the market. It's just important that we stay ahead of the development of the -- that valuable acreage up in the Northeast, including all the shale plays, including the Utica.

John D. Edwards - Morgan Keegan & Company, Inc., Research Division

Okay. And then, could you talk about -- I think last quarter, you were talking about CapEx going forward somewhere in the $400 million range and you're coming out now here, midpoint about $650 million. What -- could you talk about what were the changes? What -- could you talk about what specific projects have upped the level of cap spending opportunity for next year?

Frank M. Semple

John, I'm surprised you had to ask that question.

John D. Edwards - Morgan Keegan & Company, Inc., Research Division

Well, I asked the different way this time.

Frank M. Semple

No, absolutely. The -- it's a very dynamic marketplace in the Northeast. And every quarter, as you know, we try our best to give you our best perspective on capital going forward because, obviously, we understand it's a real critical part of your analysis. And last quarter, we were giving you our best shot in terms of where we thought our 2011 capital spending was going to be. And since the last quarter, there have been a number of projects that have been announced and some that have not been announced yet, that are supported by agreements and that we are moving forward with. So it's just the -- that increase in capital for 2011 is just simply a result of the significant increase in demand for these gathering and processing and NGL fractionation, transportation projects. And the ones that -- the projects that really have been completed recently have, again, just kind of detailed the incremental increase in capital in 2011 and also are impacting our 2012 guidance for capital would be -- in Liberty, we have both the Mobley 1 and Mobley 2 processing plants, we have the -- which are -- the Mobley 1 was a -- is a 120 million cubic feet per day project and Mobley 2 is a 200 million cubic feet per day project. The Sherwood project is a 200 million cubic feet a day project. We have the Mariner West pipeline, which -- when we completed the agreements -- when the agreements were completed for Mariner West then we added that capital into our forecast for 2011 and 2012. One of the bigger impacts came from the deethanization part of the Mariner West project and, obviously, would go to support other ethane projects. That includes the 75,000 barrels a day of deethanization at Majorsville and Houston, and then again that's a 2011 and 2012 project. And then another large project was the rail facility at Houston. So it's been a -- obviously, these projects -- our process involves adding capital to our annual plan and our guidance as these projects are close to being 100% completed from an agreement standpoint. And so that's why we've seen these recent increases in the last part of 2011.

John D. Edwards - Morgan Keegan & Company, Inc., Research Division

Okay. And then as far as -- I mean, your liquidity position here, you've got -- per your press release, nearly $900 million of cash, $720-some-odd million of availability on your revolver, that's roughly double the amount of CapEx -- announced CapEx here for the next 5 quarters. Looks like cash alone is enough to handle all your CapEx requirements. Certainly, suggests -- maybe there's other plans or additional plans, your acquisition related, maybe you can talk a little bit more about that.

Frank M. Semple

Well, the capital market transactions that you mentioned and we talked about in the formal comments was -- they are really designed to support our best view of capital requirements going forward. And obviously, we also have the component that relates to the potential redemption of our 2012 notes. And so again, we lay out our best understanding and best analysis around our ongoing capital needs for all those requirements. And that being said, we were able to hit the market at the right time and get really good execution and pricing for these bonds and for the equity. So we felt like we needed that capital flexibility in order to give us the ability to support our capital program, as well as some other projects that we're looking at, that might come to fruition over the next several months. So yes, we were just ensuring that we were not lacking when it came to the capital required to support our ongoing growth programs. As far as expansion and as far as acquisition goes, the -- I'll make my usual statement that there are a lot of acquisition opportunities that we continue to evaluate, but our capital program really doesn't assume any execution of those acquisitions. And in fact, our capital market transactions -- our financing plan does not assume that we're going to close on any of those transactions. So it's really the capital -- our balance sheet is really being driven by what we really clearly see in front of us.

John D. Edwards - Morgan Keegan & Company, Inc., Research Division

Okay. You certainly have plenty of powder. With -- you received a credit upgrade here and just curious, with the very positive outlook, this -- what kind of metrics, given your business model, would you need to see in terms of EBITDA leverage and coverage to get to investment grade?

Frank M. Semple

I'll let Nancy answer that, John, but the -- that's a fair question. I mean, with -- as far as just our perspective about investment grade, it's clearly a long-term objective, but our ability to get there really depends on continuing to make the small steps that we have around our business, around EBITDA, around our leverage, around our fee-based contracts, so it's not something that keeps us awake at night, but it's clearly a long-term objective that we continue to work hard on. And in fact, the recent progress that we've made on our ratings have given us the opportunity to significantly decrease our cost to capital. So now that's kind of a big picture view, and I'll let Nancy kind of talk about the metrics.

Nancy K. Buese

Yes, John. The way I kind of think about it is there are sort of 3 components. One is size and scale. As we get closer to investment grade, we still -- we need to get bigger yet and we're on track to do so. The second fact that would sort of be the credit metrics and again, as Frank's point, we continue to improve there and are working towards investment grade credit metrics, and I think we're headed in the right direction, the right key there. And then the third bucket is that commodity exposure percentage, and as we renew contracts, as we get new contracts, that's certain an objective to get a higher percentage of fee-based business. And I think all 3 of those combined, there's not a magic moment in there when you just suddenly get to investment grade, but what you have seen from us is continued improvement and continued upgrade, and I think we're headed that right direction. And it's very hard to say when we might get there, but I think what we can say is, we're focused on the right things, we're making great progress, and it will happen at some point down the road, we believe.

John D. Edwards - Morgan Keegan & Company, Inc., Research Division

But could you say, in terms of size and scale, what's the rough EBITDA number? I mean, is it $600 million to $700 million? Just.

Nancy K. Buese

That's real hard for us to say because I don't think it's the hard and fast with the ratings agencies, that sort of there's a lot of subjective components to that side. I think that would be hard for us to say.

Operator

[Operator Instructions] Our next question, from Louis Shamie, Zimmer Lucas.

Louis Shamie - Zimmer Lucas

I guess my question is a little bit of a follow-up from John's question. When it comes to the CapEx for next year, how does that roughly divide out? How much is supposed to be, let's say, funding for Liberty and how much kind of gets allocated to the rest of the business?

Frank M. Semple

Yes, for 2012, Louis, the lines here, about 80% of our CapEx in 2012 is going to support -- for the support of the Liberty joint venture, so it's Marcellus-focused.

Louis Shamie - Zimmer Lucas

And most of those projects, I guess, are coming online in 2013 -- meaning, the impact of that spending will show up in '13?

Frank M. Semple

No, most of it is just going to be in -- are you talking about the 2012 CapEx?

Louis Shamie - Zimmer Lucas

Yes, the 2012 spending, I guess.

Frank M. Semple

If it's -- the way that we provide our guidance is that -- since we are providing guidance in the $600 million to $700 million range, that's actual spending. That's not commitments.

Louis Shamie - Zimmer Lucas

Oh, I'm saying in terms of the cash flow generation from that spending, I guess, when you start to see that attribute.

Frank M. Semple

It's spread out. I don't have the actual time frame in front of me, but the -- it's a fairly -- because there's so many projects included in 2012, most of those are these plant projects, they're -- the majority that EBITDA is going to be coming on near the last half of 2012 and early part of 2013, and so that's probably the best way to think about that. I -- the one thing I'll say, Louis, and you know us pretty well, is that the -- that our guidance -- our DCF guidance reflects our best thinking around the -- how the EBITDA is going to impact our business in 2012 and 2013. But yes, most of it comes in the later part of 2012, in the early part of 2013.

Louis Shamie - Zimmer Lucas

Great. That makes sense. And then when it comes to the East Texas project, can you talk about that a little bit and why -- what are producers seeing that necessitates expanding your capacity out there?

Frank M. Semple

Yes. It's -- that East Texas opportunity is driven by the economics of the producers' development of the rich Haynesville play. So I mentioned that our volumes and you can see in our operational statistics that we've been fairly flat out there, which is actually a major accomplishment, given the gas prices but the interest by our producers in increasing our processing capacity is driven by their interest in developing and really drilling the rich Haynesville.

Louis Shamie - Zimmer Lucas

And then my final question, it's, I guess, going back to this issue of credit metrics. Kind of at the midpoint of your guidance I guess both on the DCF side and the spending side, where does it look like -- what do your credit metrics look like at year-end 2012?

Frank M. Semple

Good question, Louis. I don't -- we don't have that.

Louis Shamie - Zimmer Lucas

It seems to me like it's something in the low 3x, is that roughly...?

Nancy K. Buese

Yes, I would guess we're getting close to 4x interest coverage and low 3s for interest expense, but I don't have those in front of me. I'll be happy to follow-up with you on that.

Operator

At this time, I'm showing no further questions. I'll turn the call over to Frank Semple for closing remarks.

Frank M. Semple

Thanks, Sarah, and thanks to all of you for joining us on the conference call today. We appreciate your interest and continuous support and, as always, if you have any additional questions, feel free to give us a call. This concludes our conference call today. Thanks.

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