Penn Virginia Resource Partners' CEO Discusses Q3 2012 Results - Earnings Call Transcript

Oct.24.12 | About: Penn Virginia (PVR)

Penn Virginia Resource Partners, L.P. (NYSE:PVR)

Q3 2012 Earnings Call

October 24, 2012, 11:00 am ET

Executives

Bill Shea - President & CEO

Rob Wallace - EVP & CFO

Bruce Davis - EVP & General Counsel

Mark Casaday - EVP & COO, Midstream & SVP, Eastern Region

Ron Page - EVP & COO, Midstream, Midcontinent

Keith Horton - EVP & COO, Coal

Analysts

Jim Spicer - Wells Fargo

Gabe Moreen - Bank of American Merrill Lynch

Morris Williams - William & Company

Michael Blum - Wells Fargo

Mark Levin - BB&T Capital Markets

Eric Anderson - Hartford Financials

Operator

Good morning and welcome to the PVR Partners 2012 Q3 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this conference is being recorded.

And I would now like to turn the conference over to Bill Shea, President and CEO. Please go ahead.

Bill Shea

Thank you very much. I appreciate everyone being on the call today. So good morning and thanks for joining us for the PVR Partners third quarter conference call. With me today is Rob Wallace, CFO; Bruce Davis, EVP and General Counsel; Mark Casaday who runs our Eastern and Midstream business; Ron Page, who runs the Midcontinent and Midstream business; Keith Horton, who runs our Coal segment and Steve Milbourne is here as always because he is our Investor Relations guy.

So with that, Bruce would you like to give your forward-looking statements and I will give a few brief comments and then open it up to questions.

Bruce Davis

Thanks Bill. In the course of our remarks and the subsequent Q&A session, we may be making some forward-looking statements. For purposes of facilitating a good discussion, I'll refer you to the forward-looking statements as referenced in this morning's press release, noting that our business is subject to a variety of risks and uncertainties. For a fuller discussion of these and other risks that could cause our results to change, please see PVR’s Form 10-K most recently filed with the SEC.

Bill Shea

Thanks, Bruce. I hope you've had the chance to review our earnings release, if not, its on our website and has been released to the public.

Our adjusted EBITDA was up $1.2 million to $61.2 million and our DCF was $29.9 million versus $36.1 million last year. Our results continue to be impacted by the whole markets and low NGL prices and generally natural gas prices in our Midcontinent and Midstream business.

Conversely, we see our Eastern Midstream business growing rapidly as a result of our continued development of the Lycoming County system and the build out of achieved gathering system acquired in May of this year. And that system as you know is in Wyoming County.

We are executing on our plan in the Eastern Midstream and we are seeing large volume growth in operating earnings growth. EBITDA was $21.4 million in the third quarter versus $6.6 million last year. Volumes averaged 456 million cubic feet a day in the third quarter versus 63 million last year; and this is great growth. But more importantly, I guess, the volume yesterday was 856 million cubic feet a day and it is growing.

In the Midcontinent, our adjusted EBITDA was $13 million versus $14.1 million last year. Low NGL prices have impacted the business for sure and the sale of our Crossroads system are the main reasons for the decline.

Soft coal markets continue to depress our coal royalty business, especially in Central Appalachia. Adjusted EBITDA was $26.8 million versus $39.4 million last year and royalty tons were 7.7 tons million versus 9.5 million tons last year.

We did invest about $150 million in the quarter, including $130 million in the Eastern Midstream business. Our 2012 internal growth capital is kind of totaled about $485 million. As of 9/30, we had $457 million available under our $1 billion revolver.

During the quarter, we commenced full commercial operations of our Wyoming pipeline; did occurred in the last day of the quarter, but it was an event that occurred in the third quarter. Volumes are about 325 million cubic feet a day growing versus zero; obviously the day before 929.

We continue to expand our Lycoming County system to reach Southwestern Energy and also Shell. The expansion is expected to be completed in the fourth quarter and ready for operations and at this point in time today, we are on schedule for that completion. This expansion also includes the water pipeline expansion to these two new producers.

Just as a note, I am sure you saw in the release, the Board of Directors voted to increase the quarterly distribution as a result of the outlook for the Partnership in the coming quarters. The distribution was raised to $0.54 per unit or $2.16 annually. This is an 80% increase from the third quarter last year.

At this point, I am going to turn it over to Rob Wallace; I think Rob has a couple of comments he would like to make on the numbers and then we will turn it over to Q&A. Rob?

Rob Wallace

Okay, thanks Bill. There is just probably one comment I wanted to make and that’s regarding Crossroads. We did mentioned it in the press release, but I wanted to reiterate that was an acquisition we announced in the second quarter; we closed that July 1st so it was the beginning of the third quarter. The proceeds were about $62 million. They were used to pay down outstanding indebtedness on our revolver, but when we are viewing the information for the Midcontinent, Crossroads was probably about a $1 million and $0.5 million in the quarter of EBITDA last year and the volumes for the Crossroads plant that we are in the numbers at the bottom of the income statement there for the volumes in Midcontinent were about $50 million to $55 million a day. And then I just want to highlight that the gain on the sale of plant in the income statement is related to the Crossroads sale.

And I think other than that we can open it up for questions Bill.

Bill Shea

Okay, thanks Rob. Operator if you want to open up the lines for questions that will be great.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) And the first question will come from Jim Spicer with Wells Fargo. Please go ahead.

Jim Spicer - Wells Fargo

I guess to sort off with on the coal royalties business, so can you just comment a little bit on, are you still seeing cutbacks there or things stabilizing a little bit and what your outlook is going into 2013?

Bill Shea

James, this is Bill; I’ll now have Keith to chime in, because has much more intimate knowledge and information, but I am hopeful that things have stabilized some. We could see some additional reductions in our coal royalty volumes, but I think we are almost at the bottom. Keith you want to chime in?

Keith Horton

Well, I think right now that the market has pretty much stabilized; I think we’re getting pretty close to an equilibrium with the production and demand. It looks like that should continue right on to the fourth quarter, the remainder of the fourth quarter. The big question mark is how much business that rolls over during the end of 2012 and in the beginning of 2013 will be renewed and at what price, that's the big question mark at this point, it could, if contracts are not renewed, it could result in some additional reduction in output.

Bill Shea

Yeah alright Keith, this is a Bill, now is shouldn’t be asking you the questions, but why don't you just comment a little bit about the contract renewal process and where that is headed in your opinion.

Keith Horton

Well, the period and most of that has been delayed pushed well into the fourth quarter, most of the operating entities remain in negotiations for renewal business and new business that will continue on, I don't look for a lot of signs of contracts before the end of the fourth quarter. But pricing at least initially for some steam coal coming out of Central App and looks like its what business I'm aware of and I would caution everyone this is a very small incremental business.

But in the mid $60 or $65 range coal under contract continues to remain and all the contracts remain in the $70 to $80 range, but Mid coal business appears to have softened substantially, price ranges are running from the very low quality made at about $80 to the high volume sort of Mid A product and about a $110 to $115 of the Eleanor basin coal depending on (inaudible) and is ranging anywhere from the high $38 into the $52 range. But there is not a lot of new business included in those numbers.

Jim Spicer - Wells Fargo

Moving on to the midstream portion here, can you maybe comment a little bit on the backlog behind pipe wells that your system currently covers at this point.

Bill Shea

I will have Mark Casaday respond to that.

Mark Casaday

We still have the backlog in our Bradford County system. It's a [16] well backlog and that was as I said on the last earnings call for the second quarter that was due to a permit snap through that we had. We are currently in construction with that system, all permits are received. We see on our Lycoming system just specifically with EXCO they have about a 30 well backlog where they have accelerated their completion schedule. They are going to bring 17, they are going to attract 17 of those wells by year’s end and the balance 13 of those wells within the first quarter of 2013. We still have a backlog with range on our legacy Lycoming system that's a 13 well backlog that we have tied to and we are just waiting on completions. And as far as our Susquehanna and Wyoming system, we have less than 10 well backlog up there, currently.

Jim Spicer - Wells Fargo

What’s your comment on the current drilling activity.

Mark Casaday

Yeah, other than range reducing rigs down to the single rig next year for calendar year 2013 which they have previously announced. We haven't seen any change in the rig activity within our AODs or within pipelines that feed us through the Wyoming pipeline in our CDP. So our rig activity is other than the range dropping two rigs, which are going to do by the end of the fourth quarter this year. We see no change in activity as far as the rate count goes.

Jim Spicer - Wells Fargo

Okay, great and then the last question I had for you was on the Wyoming County pipeline, can you just remind me how much is contracted in 2013 on firm commitment or interruptible at this point?

Bill Shea

There is a firm commitment. We remember. Let me expand on that little bit. The Wyoming pipeline when we started it up at the end of September we turned our [subsequent] Wyoming gathering system around and move that down to Wyoming pipeline and then we also have in northern (inaudible) with access Midstream which is the new name of the Chesapeake Midstream and our contracted volumes for the balance of this year, $255 million a day.

So currently on the Wyoming pipeline, we're moving about 325 million a day and actually Access is about 50 million to 60 million a day short because they’ve had operational issues with the (inaudible) pressure problem, and I think this was exasperated by the fact that the Mark 1 hub line is still not in service but they paying for 255 million a day and their shipping on our system about 190 to 210, it varies about weekdays to weekends.

So they are paying for gas. They are actually not shipping but they are working out the operational issues, where we are seeing the big increase in production is on our own gathering system under the stack rate environment when you, historically those wells have fluctuated with Tennessee as line pressure and sucked on with a constant compressor suction pressure we have seen anywhere from a 25% to 50% increase in production from existing wells so that’s been significant.

Jim Spicer - Wells Fargo

Okay. And then for 2013.

Bill Shea

For 2013 at the end of the first quarter into April, we add the southern recede point which adds another 85 million a day of firm contracted commitments. So in 2013 our FT commitment from the Wyoming pipeline are 255 plus 85 of firm FT commitments. Now that second commitment the southern recede come online until end of first quarter into April of 2013.

Operator

Our next question comes from Gabe Moreen of Bank of American Merrill Lynch. Please go ahead.

Gabe Moreen - Bank of American Merrill Lynch

Couple of questions on the CapEx guidance just in terms of the lower end of the range for ‘12 can you go into a little bit of more color as to what’s driving that just to understand just that I can (inaudible) into ‘13 but just wondering kind of what’s driving the lower end of that.

Rob Wallace

Dave this is Rob Wallace and I think that and as you guessed it’s two things one is somehow to slip into next year and then some has just gone away that projects that we thought we would expend X dollars in there last or projects that we thought we do that we are no longer going to do that and there is an expansion project in the mid-continent region which went off to radar screen for us. So its kind of the combination of those two items. We had to, I think as we mentioned in the last call, we wanted to make sure, we rationalized our CapEx because when we first bought in the Chief, there were a lot of projects in the area including our [SRX] expansion in Lycoming county our big business. And after a few months of kind of seen what we had that was the reason for the decline in our card expectation on CapEx for 2012.

I think 2013, we are still looking at 200 plus, I think we said on the last call, 200 or so, that range is probably 200 to 250, but we haven't completed our budget for 2013 yet. So we have a little bit more flavor on the next call, I think.

Gabe Moreen - Bank of American Merrill Lynch

In terms of speaking of Midcon and plans, can you talk just about, your kind of related thinking there in terms of where you are, you mentioned the cancelled project, do you have an access plan and you handle at this point, you are spending any more CapEx out there, and then are your volumes right size capacity at this point?

Bill Shea

Yeah, again this is Bill, and Ron can jump it. I don't think we have an access plan. We do have a little bit of access capacity as a result for the envelope tools expansion was completed this year. We had a plan that was on order, which I think we are in the process of selling, exchanging whatever to what another third party, then actually hold an [acre] full of money, because we see the Midcontinent that has been a highly competitive area and while the volumes have been good it is because of the NGL pricing is a little challenging at this point. So Ron do you want to add to that.

Ron Page

You are correct Bill. We currently have $400 million a day of processing capacity. We are averaging around $360 million. We think we will see volumes bump up further toward the end of this year. We may get near our processing capacity but it doesn't appear now that we are going to need another plant there. It appears that others have cancelled new plants in the area also. So we are right about where I think we need to be as far as plant capacity and matching it with the activity that we see within our footprint and so on and Bill is correct we had our plant on order, we have it still on order and we are in negotiations to sell our spot in line to someone else.

Gabe Moreen - Bank of American Merrill Lynch

Got it. I appreciate that color you have. I was asking about the extra plan and that mean the plan you guys have in order, and I know you guys [haven't] found a plan for speculation business but glad you will make some money on that.

Ron Page

We will make a little bit so it worked out for us and I might add to our location which is in the Mississippian line we are seeing a significant up tick in volume there and we do have some projects on the horizon to increase the capacity of that plant.

Gabe Moreen - Bank of American Merrill Lynch

But not enough. I'm sure if you could move on new plant in there it sounds like.

Ron Page

Well, not yet. We think we can get up to the plant’s $40 million a day capacity, plant that needs some additional inlet and residue compression to get up to the $440 a day so we are working on that, working on additional gathering and we have some things we are working on that if they are successful we would be able to add another plant in that area.

Operator

And our next question comes from Dave (inaudible) of HITE. Please go ahead.

Unidentified Analyst

Is there much of a market these days for coal royalty trust interest. Do you see any movement there, any offers of people willing to buy or sell them in this environment?

Bill Shea

I’ll take that. The answer to that is not at the level that we would be willing to sell our interest. We have great coal properties. We have a great coal royalty business. It has been stressed this year. There's no question about it. But any business that produces $100 million a year of EBITDA with 40 somewhat employees is not a bad business. So we've not seen anybody step up and want to pay us a $1 billion for our $900 million tonnes of reserves. So we are happy to be where we are.

Unidentified Analyst

I see, so it doesn't seem likely then the coal business could be a significant source of capital at this point there are other higher growth initiatives?

Bill Shea

Well, it’s producing $100 million of EBITDA. So it is a significant source of capital for our other initiatives because as I think we've said in the last quarter till we are at this point, we are not investing or reinvesting in the coal business.

Operator

Our next question comes from Morris Williams of William & Company. Please go ahead

Morris Williams - William & Company

Bill, you've done a great job answering most of the questions that I had and thanks for the boost in the distribution. Can you talk a little bit about your plans to in effect market, the transformation of the company to midstream away from coal. Next year, you’ll be what 75%, 80% non-coal?

Bill Shea

That’s correct, Morris and it's always nice to talk to you as well. I would say that Rob and I and Mark and Keith and Ron, and Steve Milbourne every single time we talk to investors, potential investors, bankers whomever, we talk about the transformation of PVR 2, a Midstream company and again, it's not the coal business is a bad one. It just seems to be in disfavor today. So, we marketed every chance we get that we are putting all of our dollars, all of our investment dollars into the Midstream business.

Morris Williams - William & Company

And I guess my last question would be, would there be opportunities for further consolidation among companies in Marcellus where you might be the recipient of an offer from a larger company. Would that make sense from an operational point of view?

Bill Shea

Well, again, we don’t talk too much about that kind of stuff. We might be on the buying. I am not sure we were talking about being selling. We have a great franchise. We have a tremendous franchise in like Lycoming County and Wyoming County. So we're very, very happy to be in a position where we are in and we're going to develop that Morris. I mean, it's terrific. As you can see from the results, I mean the results are great and the Chief acquisition was the terrific acquisition and it will be great in 2013, ‘14 and beyond.

Operator

And our next question comes from Michael Blum of Wells Fargo. Please go ahead.

Michael Blum - Wells Fargo

I guess one point of clarification to Rob just on the lower coming at the low end of the CapEx, are there any projects in the eastern division that you decided not to go ahead with all in the mid time?

Rob Wallace

I would say the reduction in CapEx, there is not much. I don’t think there are any major projects that we cut back on. It was just the minor you take that one plant wit hone area and other than that we are basically expanding in the eastern. We are actually adding projects not dropping them in the eastern side.

Bruce Davis

Michael, I will give you a little more color on that. There has been some delays to build out of our east like instruments and that’s not insignificant I can’t remember what the dollar amount is but we have a producer who has not delayed what they are doing they just have a different way of going about what they are doing. So the wells haven’t come on as quickly as we have hoped. So there is some deferral and I would characterize it totally as deferral and our east crossroad system.

Michael Blum - Wells Fargo

Okay. And then just a couple of questions on the mid-continent section, can you just remind me what is the current contract mix for your processing in terms of keep all of POP reverse fee?

Rob Wallace

Sure Michael, we had said on the last call that let me just find my notes here for a second, that we were about to key pull was about 15%, POPs were about 60 and the remainder were fee. Now its kind of a moving target, remember we are hundreds of different types of contracts in the Midcontinent areas that are grouped into POPs, key pulls and fee base.

But that's a generally what we kind of have. Now remember the POPs range from all sorts of contracts from 85 to what 95-90 can be anything and they have a fee underlined them or not and generally the advantage there is we are seeing an improvement in NGL pricing from where we were on average last quarter, that's good news.

We have also seen a nice up tick in natural gas on those POP contracts where we get a percentage of the gas price that‘s also positive and those metrics have been moving up from July to October now. And so I think we are on the right side of the pricing movement currently.

Michael Blum - Wells Fargo

Okay and do you have the number for what your equity NGL volumes were this quarter in the Midcontinent?

Rob Wallace

You know Michael; we have never disclosed that and we don't. We are working on how we can get the research community and the public more information on our equity bonds but we currently don't release that.

Michael Blum - Wells Fargo

Okay, and then the last question on this segment was just, are you seeing any change in the composition of your NGL barrel in the Midcontinent and what does that look like in terms of a split between ethane, propane etcetera?

Bill Shea

Ron, why don't you take care of that? I know we haven't seen any change, but you may want to go over there and composite if you would like.

Ron Page

I don't have any composite in my finger tips, but we have seen an increase in ethane; it’s north of 45% now of our barrel and we are in ethane rejection pretty much across the Midcontinent now and probably expect to be in ethane rejection for sometime, so obviously that plays into what our actual recovered barrel is versus our theoretical barrel.

Bill Shea

Michael just on for modeling purposes our composite barrel in the Midcontinent is 42.5% ethane, 30.5% propane, ISO is about 4.5%, normal is about 11% and the rest is natural gas, pentane’s.

Michael Blum - Wells Fargo

Just last question from me. As these new pipelines are coming on to debottleneck Midcontinent from Mont Belvieu, do you have capacity in those lines to be able to get Mont Belvieu pricing?

Ron Page

We get some Mont Belvieu pricing now, but without going into any details about our commercial relationships, when those new lines come into service we expect to get more Belvieu exposure than we have currently.

Michael Blum - Wells Fargo

There will still be a mix between Belvieu and Conway?

Ron Page

It will still be a mix between Belvieu and Conway; sure will.

Michael Blum - Wells Fargo

Any guidance on what that mix is or what it will look like?

Ron Page

Well, we are still working on it and its still fluid, so I would rather not say.

Operator

And our next question comes from Adam Light of RBC Capital Markets.

Unidentified Analyst

Hi this is [Justin Swagger] on for Adam. I think most of my questions have been asked, but for 2013 in your last presentation you guys had 2013 guidance. Are you still comfortable with those numbers?

Bill Shea

Yes, at this point we are.

Unidentified Analyst

Okay. And then on Eastern Midstream segment, you mentioned rig activity kind of in line with expectations or what you see in the past, it does look like permitting activities down, has that changed your outlook or anything that out years that you are hearing from produces that maybe changes your expectations?

Bill Shea

Not so far. We've seen some of our producers give their capital budgets and drilling plans for ’13 and they were well within our expectations.

Operator

Our next question comes from Mark Levin of BB&T Capital Markets.

Mark Levin - BB&T Capital Markets

I guess Rob this one’s for you, just kind of thinking about the balance sheet, about where it is today and kind of where you would like it to be maybe by year end 2013. So what your comfort levels are?

Rob Wallace

Sure Mark. We've got at 9:30 we had total debt of about $1.4 billion versus $1.3 billion at June 30th. Debt to EBITDA for the quarter will probably be about 5.3 times and that's down pretty significantly from last quarter, but I did want to make the comment that the reason that will be down is because we do get a material project adjustment in the calculation of our EBITDA for bank purposes. So with the start of the Wyoming Pipeline, we are going to be getting a nice bump in our proforma EBITDA.

So as far as our liquidity, we've got $450 million of liquidity as of 9:30, $200 million to $250 million of capital for next year; we had to have our ratio, get EBITDA back down to 5 in the quarter by the end of next March. So our goal is to of course meet that covenant and be down closer to the 4 to 4.5 times range on debt-to-EBITDA by next March, and then still we have to maintain enough capacity under the revolver. So we’ve got all the tools available to us, notes offering and equity offering if necessary. So I think we're in good shape on the liquidity front.

Mark Levin - BB&T Capital Markets

No that’s perfect. It's great to answer. Rather I appreciate it. And then just, maybe this for Keith back to the coal business, I am trying to think about what the coal business would like from a volume perspective next year. If you are modeling this Keith, would you be thinking sort of flat with Q4 or would you be thinking down in another 5% to 10%. I mean it looks like there is still obviously pricing in (inaudible). I think you mentioned mid-60s and there a lot of producers obviously well above that, and still a lot of uncontracted tons. How would you think about 2013 from an (inaudible) perspective. I mean, it sounds like you are thinking flat, but I am just wondering if there is more than negative bias to that for next year.

Keith Horton

Fairly close to flat, that’s where (inaudible) because we don’t know about the renewal side of the acquisition, but I want to say that slightly maybe bias but I don’t mean it’s 10% that you know, might be couple of 2% or 3% but I don't think it could be that [steep].

Rob Wallace

This is Rob Wallace and I'll confirm it to negative bend on that, you know, 5% to 10% down is kind of our expectations.

Operator

Our next question is a follow up from James (inaudible) please go ahead.

Unidentified Analyst

I was going to ask about the financing, but that was already asked and answered, so thanks.

Operator

And our next question is from William Adams from (inaudible). Please go ahead.

Unidentified Analyst

Have a question you mentioned that range was laying down a couple of rigs can you give us how much volumes you are gathering from range and what impact you think that will have on your volumes?

Bill Shea

Currently from range we are moving about a 180 million a day, 170 million a day. As I stated earlier we still have 13 wells that are waiting on fracs that we have facilities to and their schedule to come on line between now the end of the year and probably into next year, and with one rig out there we will for 13 range will either be flat or slightly up when you take into decline and then they are drilling plans. That’s our expectations right now.

Unidentified Analyst

Okay. And what’s the total rig count of all the producers that you are handling?

Bill Shea

It’s a moving target because they drill a well and move it out for 14 days. So I would say that today it’s discounting those two rigs that ranges is said they are going to lay it down there, they haven’t moved them yet. It’s probably in the 10 to 15 rig range within [RAOD] and also within the pipeline to deliver to us at [GDPs]. As expected that number moves all the time.

Unidentified Analyst

Your ‘13 guidance in (inaudible) what kind of volumes are you looking forward in the eastern midstream segment for next year?

Bill Shea

Well, go ahead Rob, its okay Ron.

Unidentified Analyst

Bob do you had a number?

Rob Wallace

No, I got the other thing; don't have the volumes in front of me. So I bet that Mark is going to answer that, and he will say about a B to B and a half during the year.

Mark Casaday

So the answer, I was coming Rob.

Unidentified Analyst

Okay, that's great. It’s great, and kind of flattish in the Midcontinent?

Rob Wallace

Flattish just like we have, yeah.

Unidentified Analyst

Okay, and then on your distribution it was really good to see continued growth, but your coverage is still below one. I just wanted to get your thoughts is to what you are targeting there over 6 or 12 months in your coverage ratio?

Rob Wallace

You know I can take this, this is Rob. We talked about last quarter that we wanted to be at kind of a one-times one coverage for the long term. And yes, the covered ratio are [anemic], but the point we made last quarter and we are making at this quarter again is that, we look out eight quarters to see where we expect to be and based what our view of the future is and our growth expectations that’s what drives us to decide on the distribution growth today. And so our outlook for the future is bright obviously, and see a lot of growth especially in the eastern part of our business on the natural gas side.

One point, I would like to make though about that is that there is a few factors one is as we want to look at that one point one times coverage on a diluted basis, meaning all the equity included in that calculation, meaning the stuff the equity units are currently being picked and the ones that are currently not being paid until next September that are owned by Chief.

And part of our DCF calculation and we will probably talk more about this on our next call but we've got in our non-GAAP page in the calculation of DCF we've got a line item for replacement capital expenditures which as if you've been on our calls and you follow the company is that there is no expense related to that, it’s a charge that we put in, in calculating our DCF that was kind of expected to account for the depleting nature on the coal side and we started that March of ’11 when we merged the GP into the MLP and its likely that a lot of analysts are treating that in many different ways and its kind of been confusing deduct on the calculation of our DCF.

So we will probably, and that's $26.9 million currently in the calculation of DCF which we will probably no longer deduct starting next year because again there is no specific cost to it and what we would rather do is manage the business to as you said a coverage ratio and that's probably what we wind end up doing next year. I just wanted to make that point.

Bill Shea

Rob is it fair to say that in the fourth quarter we would expect a great improvement in our coverage ratio over time?

Rob Wallace

Bill basically for everybody on this call we should be seeing an improvement in our coverage ratio every quarter over the next four quarters.

Bill Shea

That's right and I agree with that.

Operator

And our next question is from Eric Anderson of Hartford Financials. Please go ahead.

Eric Anderson - Hartford Financials

I wonder, given the sale of your crossroad system earlier in the year, if we see other actions like that where you allocate capital from the Midcontinent, Midstream over to the Marcellus?

Bill Shea

Well, I will start with that and Ron if you want to add something please go ahead, but that system as we were operating it was not anywhere near at its capacity and it had an absolute higher and better use for DCP to purchase it from us and they paid us great multiple in our opinion and so we just decided to divest ourselves of that system. I don't think it’s not an ongoing effort to reduce our presence in the Midcontinent or anywhere else but that was a situation that just arose that seemed to make a lot of sense to us.

Ron Page

Well and I would add that we never had a real gathering system there. We built the plan in conjunction with PVOG. They actually field gathered gas to a couple of CDPs that we then picked up and brought into the plant and its hard to have a processing plant and complete if you don't own gathering also and we just didn't own any gathering in that area and we are unsuccessful in buying the gathering systems that came up for sale and as you probably know PVOG basically stopped all activity there. So it did was a deal that worked for us. If you did look back economics added during the, after we built it during the period we owned it, we made a great return but going forward we couldn't do very much with what made sense to divest and it worked out for us. So it was one of the one off rather than year-over-year loss, kind of economics of the Midcontinent versus the Marcellus.

Bill Shea

Absolutely, yes.

Operator

(Operator Instructions) We have no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Shea for any closing remarks.

Bill Shea

Well thanks everybody for listening and if you have any additional questions, obviously call us up and we will get you the answers as best we know and we certainly will talk to you after the fourth quarter earnings are announced. Thanks very much.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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