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Executives

Frank M. Semple - President and Chief Executive Officer

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

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

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

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

Analysts

Michael Blum - Wachovia Securities

John Edwards - Morgan Keegan

Mark Easterbrook - RBC Capital Markets

Xin Lu - JP Morgan

[Todd Wood] - Wood & Company

MarkWest Energy Partners LP (MWE) Q2 2008 Earnings Call August 12, 2008 4:00 PM ET

Operator

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

Dan Campbell

Thank you, Lisa and good afternoon everyone. This is Dan Campbell. I'm the assistant treasurer here at MarkWest and we thank you for joining us today. Our comments today will include forward-looking statements which involve risks and uncertainties and are not guarantees of future performance.

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

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

Frank Semple

Thanks, Dan. Good afternoon and thanks to everyone for joining us on today's call. With me is Nancy Beuse, our Chief Financial Officer, Randy Nickerson our Chief Commercial Officer, John Mollenkopf, our Chief Operations Officer, and Andy Schroeder, Vice President of Finance and Treasurer.

I'm going to start with a brief overview of our performance and outlook followed by comments from Nancy, Randy and John on our financials, our business development activities and our operational status. As usual, we're going to try to keep our comments pretty tight to give us time for your questions a little later.

We've had a very strong second quarter. Distributable cash flow was $56 million for the quarter and $111 million year-to-date. Year-over-year distribution growth was 19% and we have maintained a conservative distribution coverage ratio of 1.6 times.

Our performance and ability to continue to provide quality service for our customers has resulted in another increase in our guidance for both gross capital and distributable cash flow and Nancy's going to discuss those in more detail in a few minutes. We're certainly proud of our results to date and our future growth opportunities, but one of the best decisions we made this year was to complete our capital market transactions early this quarter. We raised over $660 million of debt and equity in a very challenging market which essentially pre-funded our upside capital plan.

Through the first half of 2008 we have spent approximately $200 million on high quality growth projects, well on our way to the successful execution of our capital plan. And as of June 30th we've had approximately $280 million of cash on our balance sheet, an undrawn revolver and a strong coverage ratio. In other words, we have plenty of dry powder to support our current capital program and continue to stay optimistic on new projects and capital market transactions.

With our diverse set of assets situated in some of the best resource plays in the U.S., we are well positioned to participate in the significant need for quality midstream infrastructure that support the growing demand for natural gas in the US. Randy and John are going to provide a more detailed update on business development and operations, but I want to take a minute to mention that we are very excited about the breadth of large scale expansion projects that are underway in our existing operations and projects that we recently announced in Appalachia, western Oklahoma and southeastern Oklahoma.

These projects which are primarily driven by the growth of our producer customers are awarded to MarkWest because of our consistently high quality service for our customers and the overall service that we provide to the customers. By the end of this year we will have completed $1 billion of capital projects over the previous 36 months. These investments are fueling our strong growth in cash flow and distributions in 2008, and will continue to provide solid growth for years to come.

Before turning this over to Nancy, I want to also comment on our risk management program in order to address recent investor questions. The overall objective of our commodity risk management program is to provide a long-term, disciplined approach that hedges our physical positions and allows us to deliver sustainable growth of cash flows and distributions. We are conservative as we set our hedge position targets to ensure that we have physical production to support our hedges and MarkWest does not participate in speculative trading. Now with that, I'll turn it over to Nancy to cover our financials and the details of our hedge program. Nancy.

Nancy Beuse

Thanks, Frank. Second quarter was another great quarter for us. We generated record DCF of $56 million for the quarter which positions us well to meet our increased guidance for the year which I'll discuss in a bit.

In response to several recent investor inquiries we've decided to include adjusted EBITDA on our earnings release. We calculate adjusted EBITDA as EBITDA adjusted for non-cash derivative activity and non-cash compensation expense. Adjusted EBITDA in the second quarter of 2008 was $74.8 million and was $148.2 million for the first half of 2008.

The continued solid performance of our assets supported an increased quarterly distribution to $0.63 per common unit while maintaining a strong coverage ratio of nearly 1.6 times. This was a 19% increase over the same quarter of 2007 and a 5% increase over first quarter of 2008.

Randy and John are going to discuss the details of our commercial and operational activities, but let me touch on the great performance of our operating segments. All three segments delivered strong financial results in the second quarter of 2008 with operating income nearly doubling when compared to the same quarter of 2007 in the southwest segment and increasing by more than 50% in the Gulf Coast and northeast segment. The improvement was driven by a combination of [inaudible], pricing environment, solid operating performance and higher volume.

Segment operating income does not include the effect of our derivative instruments which we use to actively manage the downside risk that exists in commodity-based contracts. Our hedging time horizons are rolling 36 to 48 month period and we use a combination of hedging instruments including swaps, callers and puts and we use both direct product and proved proxy hedges. The details of our hedging program are fully outlined in our 10-Q which includes our sensitivities to crude oil and natural gas pricing. As a midstream service provider focused on gathering and processing we have a mix of Cs, TLP and [T pull] contracts. That mix changes over time as we modify contracts and/or sign new agreements.

Looking forward for 2008, with the current hedge plan in place approximately 65% of our net operating margin is comprised of C-based contracts and our hedge positions. Over 90% of our hedges have been consummated with our bank group counterparties who are lenders in our $350 million secured revolving credit facility. This is an important point because the credit facility structure sets that we're not required to post margin calls for negative mark-to-market positions. This improves our liquidity and it allows us to utilize flops to support our [keep hold] positions as a more effective type of derivative instrument.

As Frank said earlier, the overall objective of our commodity and risk management program is to provide a long-term disciplined approach that hedges our physical position to allow us to deliver sustainable growth with cash flows and distribution. A natural consequence of the associated accounting treatment is that we will experience volatility in our income statement related to the change in mark-to-market of our derivative instruments when commodity prices are volatile.

Our second quarter financial results included realized losses on derivative instruments of $15 million and an unrealized loss of $250 million for the mark-to-market of those derivative instruments. The unrealized component is a non-cash item that does not affect distributable cash flow.

Moving to SG&A expenses, total second quarter SG&A was $16.6 million of which $13.8 million was cash SG&A. This was an increase of $2.2 million of cash SG&A compared to the second quarter of 2007 which resulted from costs to support our growth. For the balance of 2008 we expect to incur approximately $13 million of cash SG&A per quarter.

Turning now to the balance sheet, the partnership's total assets at June 30, 2008 were $2.6 billion compared to $1.5 billion at 12/31/2007. The large majority of this increase was due to the step up of the partnership assets, a result from merger accounting and $193 million was due to our capital program in the first half of this year.

Total debt at quarter end was $987 million which gave us a debt-to-capitalization ratio of 52% and a leverage ratio of approximately 3.9 times. We spent $109 million on capital expenditures in the second quarter for various growth projects in our operating areas bringing our year-to-date gross capital expenditures to $193 million.

In terms of maintenance capital, we spent just over $1 million in the second quarter. As we look ahead, we're off to a great start this year and we've increased our 2008 VCF forecast to a range of $220 -to$240 million from last quarter's range of $180 to $200 million. The increased range in our guidance is due to the impact of recently announced projects, favorable NGL price and processing margin environments. Just to be clear, this guidance is based on the current commodity price strip and considered the reasonable range of potential price volatility.

Regarding gross capital, we're very excited to be in a position to once again increase our 2008 gross capital forecast to a range a $500 million to $550 million from last quarter's guidance of $375 to $425 million. Again, this increase in growth capital is due to the recently announced agreements including Appalachia, western Oklahoma and southeast Oklahoma. As it relates to our increased capital program we have a strong balance sheet with $280 million of cash at June 30 and an undrawn revolver.

As I've mentioned on previous calls, we've used financial flexibility as an important component of our growth strategy and one of our key objectives is to anticipate and stay ahead of our financing requirements.

Earlier this year we placed $500 million of senior notes and completed $171 million equity offering. Both offerings were significantly oversubscribed in a challenging capital market and gave us the opportunity to broaden our investment banking relationships and portfolio as equity investors.

Looking ahead we'll take a similar approach to accessing the capital markets on an opportunistic basis according to market conditions and our capital requirements. Even though our capital plan has continued to grow, the cash in our balance sheet plus our currently undrawn revolver will provide the liquidity we need to execute in our current 2008 capital plan. With that I will turn the call to Randy and John to discuss our business development and operational activities.

Randy Nickerson

Thanks, Nancy, starting with southeastern Oklahoma where we have invested over $300 million to date to support development of the Woodford Shale, gas volumes continue to climb and we are currently gathering over 325 million cubic feet a day, an increase of over 150% from the same period last year. Newfield and our other producer customers continue to improve their drilling and completion techniques and average well performance continues to grow.

We're excited about the recent announcement that BP purchased a portion of Chesapeake's reserves and production, the Woodford, for $1.75 billion and it provides great validity to the potential of this very significant shale play. We believe it is also very significant that Newfield has announced plans to increase its rig count to 17 rigs by the end of 2009 and to eventually operate 24 rigs in the Woodford.

Our investment in southeastern Oklahoma continues to generate new growth opportunities and we announced last week that we purchased a gathering asset in southeastern Oklahoma of PetroQuest Energy. We also entered into additional agreements under which we will extend our gathering system to integrate a key portion of the acquired gathering assets. In addition to the $41.3 million acquisition price we currently plan to invest approximately $50 million in 2008 and $13 million in 2009 to build out and expand the gathering system.

PetroQuest has done an exceptional job of developing the Woodford Shale in the northeast part of the field and have grown their Woodford volume from less that 15 million cubic feet a day to over 40 million cubic feet a day in just the last six months. We believe this acquisition which added roughly 60 million cubic feet a day of combined Woodford and coal bed methane production made tremendous sense for both MarkWest and PetroQuest and is another great example of partnering with our producer customers.

In addition to the gathering expansions, our Centrahoma processing joint venture in southeastern Oklahoma is currently operating at 100 million cubic feet a day and we are finalizing design with our partner Enterra Resources to expand the processing facility.

We're also pleased with the great performance of our Arkoma connective pipeline – the progress, excuse me, of our Arkoma connective pipeline. We have signed binding [inaudible] agreements which accounts for approximately 90% of the initial capacity of the pipeline. We finished the three filing review procedures and have filed our formal certificate application.

We're now working closely with the FERC staff and other agencies to complete the review of environmental issues and our proposed tariff. We are on schedule to receive the first tariff, first certificate by mid October; although timing of the certificate is ultimately under the control of the FERC. We have locked in prices for the major piping compression equipment and we are still on track to begin construction as soon as we receive the first certificate with an expected in service date of May 2009.

One of the key limitations of almost every new shale play is the significant infrastructure required to fully develop the field. However, in the Woodford we have invested significant capital to build a large gathering backbone over the majority of the field that can typically be expanded simply by adding compression. This scalability provides MarkWest and our producer customers with significant advantages and is one of the major reasons we have been successful.

Over the past 18 months Newfield and other producers have rarely if ever had to wait on infrastructure to maximize their production. Our significant gathering and processing infrastructure, multiple interconnects, including the Arkoma connector pipeline, help make the Woodford Shale one of the premier investment opportunities for our producer customers.

In western Oklahoma our earnings release highlighted another key expansion project with Newfield Exploration. We executed a new agreement that will result in the investment of approximately $75 million in 2008 to expand our gathering system approximately 60 miles into the very active Texas panhandle where Granite Wash gas volumes continue to grow significantly. We are very excited by the drilling results where we are building new gathering infrastructure and the area provides us with new opportunities to gather and process gas well into the future.

We recently completed a 60 million a day processing expansion in western Oklahoma which we expect to fully utilize as soon as our gathering expansion is completed in October of this year. We anticipate investing up to an additional $55 million in the future to add new compression and processing capacity in support of this agreement.

Now turning to east Texas, the average volume of gas that we gathered increased in the second quarter to 431 million cubic feet a day. During the second quarter we also executed significant new gathering and processing agreements with Anadarko, Chevron, PetroQuest, Devon and others and we continue to expand our area of operations.

In August we began gathering gas under many of those recent agreements and the volume of gas that we gathered reached a record 465 million cubic feet a day just last week. We are also currently operating at our processing capacity of 200 million cubic feet a day and we are on track to complete our 80 million cubic feet a day processing expansion by the end of 2008.

Our producer customers continue to expand their horizontal drilling programs and we continue to see new opportunities to expand our operating area. It appears that the Haynesville Shale may also expand under a portion of our operating area in east Texas. We continue to actively evaluate the expansion of this important new shale play and believe it could supply significant new gathering opportunities in what is already our single largest operating area.

Now moving to Appalachia, the expansions of our existing Appalachian processing in fractionation assets continue to move forward on schedule. We completed the Kenova plant recovery project as planned and we expect that our project to nearly double the capacity at our Siloam fractionation complex will be completed in November of this year. In addition, the new processing plant at our Cobb facility is still on schedule to be completed in the first quarter of 2009.

The final area that we highlighted in our earning press release for additional growth capital was our Marcellus gathering and processing system. We are diligently working towards a key October start up for the initial operation of our gathering and processing assets and the rich gas area of the Marcellus, all of which are currently dedicated to moving Range Resources significant new production to market.

The first phase of the installation – the first phase includes the installation of a 30 million cubic feet per day mechanic refrigeration processing facility and at least three new compressor stations. By the end of the year, we plan to have in service a parallel 30 million cubic feet a day cryogenic processing plant. We'll have installed up to eight new compressor stations and approximately 35 miles of high pressure gathering lines.

These projects will add a significant amount of gathering and processing capability by the end of 2008. And in order to support Range's very significant drilling program, we have already agreed to install an additional 120 million cubic feet a day processing plant by the end of 2009.

In our earnings release we increased our anticipated 2008 investment to support Range's drilling activity in the Marcellus to $75 million. And we currently estimate we will invest up to an additional $125 million in 2009. We are currently the largest processor in Appalachia and by the end of this year we will also be the largest processor in the Marcellus.

Because we already have a significant amount of assets in the area we're in a great position to efficiently and timely provide gathering and processing services to other producers. We are not in a position to make any announcements today; however, we are in discussions with a number of other producers regarding providing this critical infrastructure. We believe the Marcellus play will require well in excess of $1 billion of new infrastructure and we are well positioned to play a significant role to meet that need.

This certainly is an exciting time for MarkWest. When we look back over the last 18 months we have announced over $1 billion of new organic projects and we have been very fortunate to develop theses projects during a time when acquisition prices have been at all time highs. However, we also remain very active in evaluating acquisition opportunities. Our organic project success and the elimination of the IDRs significantly improves our competitive position. And as Frank said earlier, our success allows us to be opportunistic as we evaluate future strategic opportunity. With that I will turn it over to John.

John Mollenkopf

Thanks, Randy. As you can see the MarkWest team is quite busy executing on what is by far the largest capital program in company history. We believe that our past performance and industry leading customer service has been the catalyst for MarkWest being chosen to provide mid stream services in support of our producer customers' significant expansion plan.

Prime examples include our recently announced projects in western Oklahoma and the Marcellus Shale. In the case of western Oklahoma our performance for new field exploration in the Woodford Shale was the reason we were asked to expand the Granite Wash play in the Texas panhandle. Likewise Range Resources chose MarkWest and the Marcellus Shale based on our performance for their [EMP] piers in the Woodford Shale and our long-term presence in the Appalachian basin.

We believe our continued success will be based on our ability to maintain the same level of service going forward as we have in the past and never lose sight of that requirement. To that end I am proud to say that MarkWest has a very talented work force that is ready, willing and able to perform as promised under our signed agreements. We have significantly expanded our staff over the past several years and have added many new key positions to keep up with the high level of internal growth project execution.

Year-to-date we have spent approximately $200 million of our expected $500 to $550 million capital plan on time and on budget. Obviously, there is a significant effort required for the balance of the year, but we are up to the task. With that I will pass the call back to Frank.

Frank Semple

Thanks, Randy and John for that overview. I think that you can all sense from our discussion that we're clearly excited about our performance so far this year and the growing slate of capital projects that will allow us to continue to grow for the foreseeable future. Our priority is to continue to execute on these growth opportunities and to drive sustainable growth in DCF and distribution. Our 2008 capital program is funded and we are on track to deliver another record year of financial performance.

Looking forward we remain focused on the attributes that drive our success: solid operations, high quality customer service and conservative financial management. With that, Lisa, let's open it up to questions.

Question-and-Answer Session

Operator

Yes, thank you. (Operator Instructions) And our first question comes from Michael Blum and please state your company name.

Michael Blum - Wachovia Securities

Good afternoon. Wachovia. Can you guys hear me?

Frank Semple

Hey, Michael.

Michael Blum - Wachovia Securities

Hey. A couple of questions, one, given all the new projects and I would assume some of them are pretty competitively bid, can you give us a feel for what types of returns you're expecting across these different projects?

Frank Semple

Yes, Michael these organic projects come across the board on average they're in the mid teens as I mentioned. So these that we run our economics on de-levered rate of return basis so around 15% would be kind of a good way to model it.

Michael Blum - Wachovia Securities

Okay. And then just to clarify in terms of your hedge program, you said you do 90% of your hedging with your bank group. Is that correct?

Frank Semple

That's correct.

Michael Blum - Wachovia Securities

Okay so on that last 10% does that mean that you do need to post margin or letters of credit?

Frank Semple

Yes.

Michael Blum - Wachovia Securities

Okay and can you tell us where that stands today?

Frank Semple

On the LC?

Michael Blum - Wachovia Securities

Yes.

Unidentified Corporate Participant

There's a $20 million line of credit that goes to the support of that commitment right now, Michael.

Michael Blum - Wachovia Securities

Okay. And then just a last question, in terms of the Woodford Shale, can you give a sense geographically where PetroQuest sits relative to Newfield and are there any synergies there or potential other opportunities that you gain by being in the play with multiple areas.

Frank Semple

Yes, absolutely. We've try to keep this tight but I'll let Randy answer that.

Randy Nickerson

Those are code words for not talking for an hour I guess. Yes, given Frank's clear guidance to me PetroQuest is kind of up in the northeast part of the field where, you know, the Newfield is generally to the south of them and yes, it's an area of the field that we've looked for opportunities to get into because it's growing so much.

Other producers have done a great job up there as well and so we've wanted to get up there and now that we're up there and have extended our system up to connect to their system, we absolutely think there will be opportunities to gather other people's gas including Newfield; we've talked about moving up there. The other thing it does is there's a lot of gas out of there that's coal bed methane.

One of the real surprises that we've enjoyed is the significant value we can bring to coal bed methane producers up there particularly Canaan Resources; we've talked a lot about that. And we think this kind of opens up another potential opportunity to access a whole bunch of those coal bed methane producers, better meet their needs than they have in the past, allows us to expand their systems and so we're looking for a good bit of synergies in that part as well.

Michael Blum - Wachovia Securities

Thank you.

Operator

(Operator Instructions) Our next question comes from John Edwards and please state your company name.

John Edwards - Morgan Keegan

It's John Edwards with Morgan Keegan. Hello, everybody. Just congratulations on a great quarter. Are there any plans to up-size the revolver?

Frank Semple

Well, John we think we have adequate liquidity right now. I mean the impact or result of actually up-sizing that facility, you know, comes at a cost, there's pros and cons, but we are continuing as we grow in size we continue to evaluate the value of actually increasing the size of that revolver and liquidity. So yes it's something that we continue to evaluate.

John Edwards - Morgan Keegan

Okay. And then I just wanted to verify are you saying the initial – you're going to have initial projects on Marcellus Shale coming on this year? I didn't catch it. Was it this year or next year, you know, for starting up, you know, some of the compression and processing?

Frank Semple

Yes, let's hit that one, Randy, a little bit harder so we can kind of clarify the phases and some of the timing of the initial project.

Randy Nickerson

Sure, by October of this year the first plant which is a 30 million a day mechanical refrigeration plant will be on line. By the end of this year, by the end of 2008 an additional 30 million cubic feet a day which is a cryogenics plant will be installed. So what, 60 million cubic feet a day of capacity by the end of this year, the cryo plant, you know, end of this year, very early next year and in conjunction with that we're building, of course, all the compressor stations to bring in the gas. We talked about three of those being complete by October and eight of those being complete by the end of this year. So that would be 60 million in capacity by the end of this year for processing or close thereabout.

We have also ordered and are working towards installing an additional 120 million cubic feet a day processing plant by the end of '09 so that would take from what we've currently ordered, we're already up to 180 total processing capacity although only 150 million cubic feet a day of that being cryogenic processing. That's what we've announced so far. We're obviously looking at other ways to support the growth but that's where we have announced so far.

John Edwards - Morgan Keegan

Okay, great. Thanks for the clarification on that. And then the Foss Lake expansion I was modeling, that was going on line soon. Where does that stand?

Frank Semple

Yes, John. John Mollenkopf, why don't you go ahead and give us the status on the graphite two expansion in Foss Lake.

John Mollenkopf

Yes, we're expecting to bring that production on line in October and we should be bringing on about 60 million cubic foot a day at that time from the Texas panhandle from that project into our Arapaho processing facilities.

Frank Semple

John there's actually two pieces to that question, really. You have, because we've talked previously about the plant expansion that was recently completed. That's already in place and it's obviously adding, you know, some value to the existing gas that we gather in western Oklahoma and John Mollenkopf was explaining that, you know, this new agreement that we signed with Newfield that we just announced and we will increase the amount of gas that we gather from Newfield to the panhandle by about 60 million. This is rich gas and it will be processed in that Arapaho plant starting in the October timeframe.

John Mollenkopf

Yes, the Arapaho plant actually is completed now and so it's waiting for the gas, so as soon as we get the gathering pipelines installed we'll be online.

John Edwards - Morgan Keegan

Okay, great. Yes, I appreciate the clarification on that, you know, because we were modeling it coming on, you know, this quarter and I just wanted to clarify on that. Okay and then on the area of cost increases, can you update us on that? It sounds like things have been tracking quite well. If you could give us any additional clarity on that, that would be great. [Inaudible] that everyone else is experiencing.

Frank Semple

Are you talking about the cost of construction or are you talking about …

John Edwards - Morgan Keegan

Yes, cost of construction.

Frank Semple

Yes, okay. Yes, it's a pretty challenging market. John, you want to give a little [inaudible]

John Mollenkopf

Yes, you know, a lot of these projects – the good news is that these projects are new so we've included the higher cost that we've seen, you know, escalating over the past year-and-a-half into our new cost estimates so we're hitting at the levels that we expected when we complete these projects.

John Edwards - Morgan Keegan

Okay, great.

Frank Semple

I think also to just continue, as John said with these new projects, is to complete the design in conjunction with getting the new agreements in place so we can go out and commit to particularly the pipe and compression and the processing the key long lead items for the new plant and we've been able to do that. But it is a challenging market right now because there's so much demand for steel and all of these new components. So far we've been able to manage it very well.

John Edwards - Morgan Keegan

Yes, congratulations on that. I mean, you know, we're obviously hearing from, you know, a lot of players out there that are suffering from pretty significant cost increases. Okay, well thank you very much and I'll get out of the way and let somebody else ask a question.

Frank Semple

Thanks, John.

Operator

Our next question comes from Mark Easterbrook and please state your company name.

Mark Easterbrook - RBC Capital Markets

Yes, RBC Capital Markets. I just wanted to touch base, I mean, the CapEx numbers have moved around a lot in the last one to two quarters and then also the Marcellus Shale announcement obviously that increased again. Looking at the '09, what kind of numbers should we be using in our model? Does that 500, 550 that you have for '08 roughly what you might spend in '09 or is it going to be higher than that?

Frank Semple

Well, Mark, yes, you've seen it moving around quite a bit the last couple of quarters it's moving in the right direction so we're pleased with that. We're going to start providing kind of official guidance for '09 in November when we do earnings call for the third quarter as has been our practice. But we've had a lot of discussions about the fact that we continue to announce these projects that are extending out into 2009 so you can almost go back and look at the announcements and add them up.

But if you look at the projects that have already been approved and announced that extend into 2009 that number is about $300 million. So kind of informally we already have a set of organic growth projects that have resulted in about a $300 million capital program and these are all approved and moving forward so we feel pretty good about how '09 is shaping up. We'll wait until November to update you on that but again, we expect to have other projects announced between now and November and we'll obviously continue to give you a little bit of a sense of how '09 is shaping up when we talk about those projects with proper disclosures.

Mark Easterbrook - RBC Capital Markets

Okay. I appreciate that and then I guess, following up on that you guys have done a great job of obviously raising the equity and the debt needed to finance this budget. I think you guys have something like $270 million on the balance sheet. If we continue to see the capital markets sort of act the way they have in the last two or three months, any kind of creative ways of raising that capital for that '09 budget that have been talked about by the board or the management team?

Frank Semple

Well I think you framed it correctly. We’re in good shape for supporting the capital plan that we have in place. It is a challenge in capital markets. We understand that but, you know, we have a lot of flexibility and liquidity to be able to support our plan. Absolutely, again I think, you know, Nancy and Andy could talk at length about all of the debate we have internally about the what ifs on our financing plan, but you're not going to see us get too creative there.

I think that we feel pretty comfortable that with the types of rates of return that we've seen on these projects, the fact that we don't have the [inaudible] distribution rights even in a very challenging capital market environment, we feel that we can get out if we need to and raise capital. The key is to stay ready and Nancy sounds optimistic so that when you see windows out there we have these good relationships with our banks and feel like we can hit the market quickly if we need to. Nancy, you want to add to that at all?

Nancy Beuse

No, I agree with that completely.

Mark Easterbrook - RBC Capital Markets

And as our last question on the Arkoma connector, did I hear that right that you have 90% shipper commitments on that line and, sort of, is the time line still I think since the first quarter on '09 for that to come on line?

Randy Nickerson

Yes, we're good. Yes and kind of. Our present agreement covered about 90% of the current capacity. Our expectation is that that won't be a problem doing that pipeline with everything certainly that the producer's doing out there. We're currently saying May of 2008, excuse me, thank you, May of 2009 for start up with that, so not quite the first quarter.

Mark Easterbrook - RBC Capital Markets

Okay. Thanks, guys, great quarter.

Operator

The next question comes from Xin Lu and please state your company name.

Xin Lu - JP Morgan

JP Morgan. Good afternoon. I have a question on the contract you have with Range. What type of gathering and processing contracts do you have over there?

Frank Semple

Yes, let's go ahead and give you a little bit more information, you know, what we can share with you as far as generally what we have out there in terms of contracts and things.

Unidentified Corporate Participant

The gathering and processing agreements that we have with Range are really a mix of d Based and POL - percent of liquid and d Based.

Xin Lu - JP Morgan

Okay. And on Haynesville and you said your current – in east Texas – you say your current gathering volume is around 460. It seems there's a slight increase from your average second quarter volume. Was that from some of the Haynesville production?

Frank Semple

Again, just to clarify, this is for east Texas you're referring to?

Xin Lu - JP Morgan

That's right, yes, the panhandle [inaudible].

Unidentified Corporate Participant

Yes, the contract – we had an average of 431 for the quarter and we're right at 465 right now so you're right. That's a good observation. We have had a significant increase in volume since the second quarter and really it was – none of that was Haynesville. It was all the new contracts that we've had I talked about with Anadarko, with Devon, with Chevron, with PetroQuest. All of those, a lot of those came on in August 1 and our volumes went up significantly and we expect those to continue to grow so you're right, it was a big increase.

Frank Semple

And really to add to that, I think that that increase is being driven by the drilling program of the producers in Panola County, Cotton Valley primarily, and also market share. So we're continuing to increase our market share in that area so we feel like we've got a very competitive system in east Texas as well as in our other areas of operation. Providing that low pressure service and high reliability and good customer service is the theme paying off in east Texas particularly as the producers start to develop some of their horizontal programs.

Xin Lu - JP Morgan

Okay, great. And now in Haynesville infrastructure do you see yourself doing more gathering type of infrastructure or are you looking past the intrastate pipeline like you did with interstate like the Arkoma pipeline something like that?

Frank Semple

Well, yes, [inaudible] in our core competency and our focus continues to be in the midstream area including pipeline opportunities both jurisdictional and non-jurisdictional. So we like the fact that we've been able to continue to expand and develop new gathering and processing agreements in our core operating areas that have also created opportunities to expand further downstream. The Marcellus, that me and Randy can talk at length and I think that – in fact, Randy, you may want to give a little color about what's going on in the Marcellus. You touched on it in your comments but that's an area where obviously there's a lot of infrastructure that has to be built to support the projected volumes.

A lot of that is in the gathering and processing areas because there are a lot of interstates out there but clearly we think we have the capabilities and competencies to operate larger scale interstate and intrastate pipeline and those are great projects for us because they typically are fee-based type services and a good complement to our portfolio of more typical gathering and processing opportunity. Do you want to add anything to that?

Randy Nickerson

Well the only thing really is that – first of all the Haynesville – we talked about that specifically. We're not currently gathering Haynesville gas. When it moves into our areas we'll have a great opportunity to do that and yes, we certainly hope some opportunities grow out of that.

One of the hallmarks of our operation really is that thinking with our customers and kind of wanting to move their gas and making sure they get to the right market is a lot of times worth thinking like them far ahead, six months, 12 months, two years down the road at what could happen. Because where they're gathering, we have great insight into those areas and that's what gives us really the opportunity to add additional services. Is that more pipeline, is it more compression, more market outlook? We're able to do lots of those things because we're involved in the process. And we just added a big interconnect this year to CenterPoint in east Texas so it's an example of we're able to be the new pipeline connection.

The Arkoma connector really wasn’t our first. We didn't talk much about the CenterPoint connection, but to help connect the markets Arkoma connector is perk-regulated pipe, longer, bigger, higher pressure but yes, it's kind of what we do. It's how we work and why producers like working with us. It's because we have done a lot like those guys.

Frank Semple

We also believe that – I know you're probably referring more to the [inaudible] gas transport opportunities that Randy alluded to in some of his comments, but the liquid side of this equation is also a very big issue and a very big opportunity particularly in areas like the Marcellus where NGL markets are somewhat constrained and the ability to manage, store, transport, process and, you know, fractionate the liquid from this gas or any type of a gas play is really a huge opportunity. And again, we operate the liquid lines today and think that [Amoloco] might create some opportunities in the future.

Randy Nickerson

Frank, I'm glad you brought that up and particularly that you mentioned Marcellus. That puts us in just such a great position because we have all that infrastructure, because we're already working on those downstream options, it's kind of how we stay ahead and really puts us in a fantastic position to continue to provide those services. I'm glad you brought that up.

Frank Semple

Thank you for that, Randy. You're going to create solutions or help provide solutions for our producer customers. You've got to have the full bag of capabilities and so that's really critical if you're going to stay ahead of the producers and meet their needs.

Xin Lu - JP Morgan

Thanks, appreciate [inaudible] color and congratulations on good quarter.

Operator

Our next question comes form Todd Wood and please state your company name.

[Todd Wood] - Wood & Company

Good afternoon, this is [Todd Wood] from Wood & Company. Thank you for hosting the call. Is it possible to provide some color on how much of the quarter's growth year-on-year was from volume versus improvements and pricing in the NGL spread?

Frank Semple

Sure, [Todd]. Let's talk first about the year-over-year increase in DCF for the second quarter of '07, second quarter '08. Andy, you want to jump in on that?

Andrew Schroeder

Sure, [Todd], I mean I guess when I stepped back and looked at the analysis in that regard it's pretty consistent with what Nancy talked about and that is that on a pre-hedge basis, about two thirds of that increase is driven by price related and the other third has been driven by operational and volume increases. And then when you look at it and layer in kind of the hedge program we've had in place, it actually puts it on a consistent basis with what Nancy talked about. And that is it is about 60% to 65% of our net increase is driven by the price increases – excuse me, 60% -to65% is driven kind of by the volume and hedge-based piece of it as opposed to pure price.

[Todd Wood] - Wood & Company

Okay. Thank you. On a related question, you've mentioned previously that with high spreads you'll maintain a high coverage ratio for cutbacks and assuming that we're at the higher end of this year's guidance of $240 million that would imply that it leaves around $90 million that would potentially be available for investment. Am I thinking about that correctly? Whatever's left over after 1.6 times coverage is available for investments.

Frank Semple

Yes, I mean, if you assume that the distribution at the end of the year is going to remain flat, yes you're doing the math right.

[Todd Wood] - Wood & Company

Okay. And related to this, you know, if spreads remain around current levels, you know, who knows if they will or not but that would leave around $100 million internally generated capital. What range of the 52% debt to total capital now would you be comfortable operating with if there were, you know, continued difficulties in the capital markets? How much flexibility do you see in that, in your leverage ratio and what is the comfort range really is what I'm asking?

Frank Semple

Well let's just give you kind of our standard, you know, comfort zone for our coverage and leverage.

Nancy Beuse

Typically we like to be in that 50% range certainly when there is volatility in the marketplace that may ebb and flow. But we would focus on getting back towards that 50% point. And then again in terms of coverage, we like to be in that 1.2 to 1.3 type range. But again, you know, from a MarkWest perspective, we're always looking out for sustainability of distribution and we maintain a bit of conservatism. So we're flexible as needed but also working towards a sustainable distribution growth and a long-term view.

[Todd Wood] - Wood & Company

Okay. And following up, Frank, on one of your comments related to the CapEx budget with the $300 million previously announced for 2009, it sounds like for rough guidance we can add in what you've mentioned in the most recent press release it was earmarked for 2009 to that, to at least begin estimating that number. Is that correct?

Frank Semple

No, I want to be really clear on this. What I was trying to communicate earlier is that number one, in November we'll give you a guidance number for 2009 both for DCF and CapEx, but the $300 million number that I mentioned earlier for '09 is simply looking at all of the projects that have currently been announced and approved and we're moving forward on. So we just wanted to give you a little bit of a heads tart for kind of doing modeling but it does include all the projects that were recently announced.

[Todd Wood] - Wood & Company

Okay, I understand. Thank you very much for your time today.

Operator

Our next question comes from John Edwards.

John Edwards - Morgan Keegan

Yes, hi. I just wanted to follow-up on Midcontinent Express, you know, you have an option to take a 10% share in that and then they recently up-sized the project. Would that change, you know, I assume you're still on track in terms of planning to exercise your options or participate even with the up-sizing?

Frank Semple

Well, yes, the way we've characterized that option is that we have the option. We'll make that decision when the [inaudible] and the [ET] project is complete and in service. It's a great opportunity for us and yes, with the recent announcements, I tender an energy transfer that they're increasing the capacity of that project and that would obviously increase the opportunity for equity in that, by MarkWest in [inaudible].

John Edwards - Morgan Keegan

Okay, great, that's all I had. Thank you.

Operator

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

Frank Semple

Thanks, Lisa, and yes, let's just wrap it up. Thanks to everyone for joining us on the call today. We appreciate your interest and obviously the continued support for MarkWest. Any questions that you have, please feel free to give us a call and we'll try to help.

Thanks a lot and that, Lisa, concludes the call.

Operator

Okay, thank you. That does conclude today's conference and you may disconnect at this time.

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Source: MarkWest Energy Partners LP Q2 2008 Earnings Call Transcript
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