Crosstex Energy, Inc. Q2 2008 Earnings Call Transcript

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Crosstex Energy, Inc. (XTXI) Q2 2008 Earnings Call August 8, 2008 11:00 AM ET

Executives

Chris Bell - Investor Relations Specialist

Barry Davis - Chairman, President and Chief Executive Officer

Bill Davis - Executive Vice President and Chief Financial Officer

Bob Purgason - Executive Vice President and Chief Operating Officer

Jack Lafield - Executive Vice President of Corporate Development

Analysts

Darren Horowitz - Raymond James

John Edwards - Morgan Keegan

(Sarah Titvo) - White River Partners

Sharon Lui - Wachovia

James

Operator

Good day ladies and gentlemen and welcome to the Q2 2008 Crosstex Energy Conference Call. My name is Laura and I will your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Ms. Chris Bell. Please proceed ma’am.

Chris Bell - Investor Relations Specialist

Thank you Laura and good morning everyone. Thank you for joining us today to discuss Crosstex's second quarter 2008 results. On the call today are Barry Davis, Chairman, President and Chief Executive Officer, Bill Davis, Executive Vice President and Chief Financial Officer, Bob Purgason, Executive Vice President and Chief Operating Officer, and Jack Lafield, Executive Vice President of Corporate Development.

Barry will begin our call with some brief introductory remarks and an overview of our second quarter performance. Then Bill will discuss detailed financial results, and Bob will provide an operational update. Finally, Barry will briefly discuss the outlook for Crosstex. At the end of the call, Barry, Bill, Bob and Jack will answer your questions.

Our second quarter 2008 earnings release was issued early this morning. For those of you who didn't receive a copy, it's available on our website at CrosstexEnergy.com. If you want to listen to a recording of today's call you have 30days to access a replay by phone or webcast on our website.

For legal purposes I must remind you that some of the statements made in this call are forward-looking and as such are not subject to many factors that could cause actual results to differ materially from our expectations as reflected in the forward-looking statements. These factors are described in our SEC documents, and we undertake no obligation to publicly update or revise the statements.

I will now turn the call over to Barry Davis.

Barry Davis – Chairman, President and Chief Executive Officer

Thank you Chris, good morning and thank you all for joining us on the call. We are pleased with our second quarter results the strong activity throughout our operations and the continued progress we are making in the Barnett Shale. The project delays in North Texas we previously talked about that impacted our second quarter results have mostly been resolved. Additionally, since the middle of the second quarter and now continuing in the third quarter we are operating in an improved processing margin environment. We expect our third quarter financial results to improve significantly relative to the second quarter and we expect to meet our financial objectives for 2008. This includes meeting our targeted 10% distribution growth for the partnership and 58% dividend growth for the corporation with good coverage for the year on both.

Over the last two years you’ve seen our progress in the Barnett Shale as we’ve become one of the leading midstream players and it was still the hardest gas plane in United State. We are now excited to seem similar opportunities developing in the Haynesville Shale gas play right. The difference is this time it is right in our backyard in North Louisiana and East Texas in an area where we are already positioned with one of the best midstream assets position to build. Crosstex is a LIG system and specifically or recently completed 24 inch Red River lateral is right in the middle of this great new play. Already industry experts predictive could be as big or even bigger than the Barnett Shale in North Texas. We have made the Haynesville a top priority equal to the Barnett Shale and we formed that came dedicated to exclusively developing opportunities for us there. Crosstex is one of the few major midstream play positioned to provide quick, efficient and cost effective takeaway capacity for the Haynesville producers. We already are a large transporter in the Haynesville area and our LIG Red River system which was completed just over a year ago is expandable.

In addition upstream gathering lines, compression and line looping can be the most expeditious ways to increase capacity our producers are developing their expansive acreage positions. We believe we can provide very effective near term capacity expansions our Red River lateral for producers. Because Crosstex is the largest intrastate pipeline company in Louisiana we have a timing advantage when compared to the new players or interstate pipelines. The new Red River Lateral which is currently operating at near capacity can be expanded relatively, quickly by approximately 260 million cubic feet a day. A small piece of what producers say they need. Beyond that we are exploring significant additional expansion projects.

In the Haynesville extends and East Texas, as a result we expect our assets there to benefit as well. Several wells in the (Bassini) of our pipelines have tested at very good rate. The volume forecast is being generated by producers who create lots of the opportunities for the midstream players and we expect to participate in our share. The Haynesville can be the next transforming event for Crosstex. We believe we can bring the experience we’ve gained in the Barnett and translate that quickly into new opportunities in the Haynesville. In addition, our trading division is in a great position to train the Haynesville production, most of which appears to include Co2 before it is transported.

We believe the continuing development of the Barnett Shale and new opportunities in the Haynesville alone will provide ample long term growth projects for Crosstex. Further we can ensure good execution in each plays and throughout our operations we’ve recently brought in additional senior commercial talent and reorganized our team to sharpen our focus on the development of the Haynesville and other emerging opportunities. I will talk more about the Crosstex organization later. But for now I want to turn it over to Bill Davis who will update you on the details of our second quarter financial.

Bill Davis – Executive Vice President and Chief Financial Officer

Good morning everyone. Turning straight to the numbers distributable cash flow for the quarter was $37.5 million which is a full 43% higher than the second quarter 2007, so obviously great growth. Our distribution coverage in the quarter dropped to 0.91 times as a result of the issues as Barry mentioned and we identified in the first quarter call. However, our coverage over the trialing 12 months is 1.1 9x, so it’s still very strong. Because of this on the strong outlook we have for the rest of 2008 and beyond we increase the distribution from the partnership by $0.1 per unit to $0.63, 10.5% above the level in the second quarter of 2007. A distribution growth continues to be very strong as is the distribution growth outlook. We also increase the dividend from the corporation by $0.2 to $0.38 per share, a 65% increase over the dividend of $0.23 in the same period last year.

As most of you know this increase was driven by the corporation incentive distribution rights. The partnerships increase in the common units outstanding including the new common units sold in April, the conversion of the subordinated C units in February and the corporation ownership share of 6.4 million of the Sub C that are now receiving distributions.

The partnership reported net income for the second quarter of $21.7 million. Net income from the quarter included non-cash income of $16.8 million, mostly attributable to the noncash marked-to-market of our floating fixed interest rate hedges. The increase in floating rates in the quarter created this non-cash marked-to-market impact. We currently have hedged $550 million at an average fixed rate of 4.2% for 2008.

After the accounting allocation of $11.4 million of income to the general partner that reflects the incentive distribution rights of $12.3 million, less a portion of stock-based compensation attributable to the corporation's long term incentive plan of about 1.6 million, remaining income allocated to the Limited Partners was approximately $10.3 million, or fully diluted income of $0.21 per limited partner unit.

For the year-to-date loss per limited partner that figure reflects the allocation of income to the Sub C units when they converted in the first quarter. We have discussed this accounting a few times in the past so I wont go over again unless some wants a explanation in the Q&A session.

Earlier this year we issued EBITDA guidance for 2008 of between 268 million and 289 million for the year. The project delays in North Texas that we’ve talked about in the first quarter, the lower processing margins in the second quarter and as Bob discussed later a 10 day second quarter units maintenance shutdown have combined and negatively impact our gross margin expectations by over $15 million in the second quarter. However, due to improvements and other parts of the business and assuming processing margins remain for the rest of the year really have been recently, we still feel we will be at or above the midpoint of the range of guidance by the end of the year. Processing margins in third quarter have significantly improved over second quarter levels as natural gas prices had declined recently by about $4 per MMB, and ethane prices have strengthened in the same period. This is having a very positive impact on our third quarter results.

Turning to liquidity. Our balance sheet continues to strengthen with pro forma debt EBITDA at the end of the quarter at about 3.9 to 1. Growth capital expenditures for the quarter were approximately $74 million, and we also stand $4 million of maintenance capital that we deduct from distributable cash flow. These are both consistent with the guidance we issued earlier in the year. We currently have over $200 million of capacity remaining on our bank revolver and we will expect to retain this level of availability through the remainder of the year. As we define projects in the Haynesville and elsewhere, we will develop financing plans as to maintain our liquidity levels. We will always manage our growth capital opportunities to be within our financing capacity.

Because of the high returns on these very strategic projects we are developing, we are confident the capital will be available. I would add that in the current environment with higher cost of capital we are prioritizing higher risk adjusted rates of return on our projects. We have plans for approximately a $196 million of great return growth expenditures for the second half of the year which we expect to fund with new capital as we traditionally have. We feel our capital availability is more than adequate for the remainder of 2008 and 2009.

Turning to other liquidity issues, I would note that the company has approximately $6.2 million of receivables from the same group companies. Average approximately $2.2 million we think would be an administrative claim and receipt of priority status in the bankruptcy. Obviously we don’t have enough information yet to evaluate our potential recoveries from these state. I would point out three things in relation to this. First, we have a monthly review of the credit of our customer base. Of our top 30 customers representing over 75% of our business, 22 of the 30 are investment grade credits and we get letters of credits or other credits of board or otherwise happy with the credit of the remaining customers. Secondly, we have a monthly review of our hedging strategy by our senior management and a strict hedging policy. We take no speculative positions, we have no dirty hedges, our liquids hedges as you can read in our quarterly filings are specific to the products we are hedging not using crude oil as a proxy. Further no one in the company is compensated for making money on any trading position. Third, our maximum margin exposure on our hedges at the height of commodity prices six weeks ago was approximately $24 million. It is much less today. So clearly no risk associated with our hedging strategy.

Turning now to Crosstex Energy Inc. Corporation had a cash balance of approximately $9 million at the end of the quarter. With each distribution time that have received now will add approximately $5 million to that cash balance as we go forward, because we continue to set the dividend as of the corporation or paying income taxes.

As stated in the press release, we don’t expect the corporation to pay any significant income taxes until after 2010, so it will be able to buildup significant liquidity that will be available for each general purposes including support of any partnership equity rise. Just a quick put and out, beginning with this quarter we have add a disclosure that has been requested by many people on this call about things like weighted average NGL prices, weighted average NGL, the gas ratios and trading GPMs in service. I will continue to be responsive to request from you all for additional information as we can make it available.

Now, I will turn the call over to Bob to review our operations.

Robert Purgason – Executive Vice President and Chief Operating Officer

Thanks Bill. I am going to went through our operations and update you on second quarter activities. I will begin in our North Texas operations. In other over 10,000 wells producing approximately 4 bcf a day in the Barnett Shale. This is pretty amazing especially when you compare these stats with 2003. We are about 2600 wells approximately 750,000 MMBTUs per day in that region. And some analysts believe that the Barnett Shale has the potential to produce more than 6 BCF a day, or 10% of the daily US production.

In line with that, our second quarter throughput for the North Texas pipeline was about 346,000 MMBTUs per day. Throughput rose to 362,000 MMBTUs in June, nearing its normal capacity. Throughput for the second quarter of 2008 on our North Texas gathering systems was about 632,000 MMBTUs per day compared with about 288,000 MMBTUs for the second quarter of 2007, a gain of 120%. June throughput increased to 690,000 MMBTUs per day. And at the end of the quarter, we connected 375 wells to our gathering system versus our 168 wells at the end of the second quarter last year. We continue to expand our infrastructure to handle the growing production of the Barnett Shale as we told you we would.

In Johnson County, one of our North Texas gathering systems, well results show initial production and sustained production rates comparable to the best areas of the play. Drilling activity is especially strong in the northern part of the county. And after experiencing delays in compression equipment deliveries and producer delays in securing right of way for floor lines, we placed our north Johnson County expansion project in service in July and we are now transporting more than 170,000 MMBTUs per day. And in spite of these delays, this project will be completed on budget. System throughput is ramping up rapidly in the third quarter and this system should approach its original plan capacity of 400,000 MMBTUs per day in 2009.

We also completed looping our West Weatherford 20-inch gathering line in Western Parker County and this expansion is enabling us to lower pressures on the go-forward system and increase our flows to our processing plants.

Speaking of processing plants, construction of Bear Creek, our fourth cryogenic plant, is on track with completion targeted for the third quarter of 2009. The facility is located in Hood County and will service our gathering systems in and around Parker County, which is the adjacent county to the north. Bear Creek will have gas processing capacity of 200 million cubic foot per day, increasing the company's total processing capacity in the Barnett Shale to 485 million cubic foot per day. Our natural gas process during the second quarter was 195 million cubic foot per day.

While limited NGL takeaway capacity has temporarily curtailed production of NGLs across the region, expansion projects this year by West Texas Pipeline and Louis Dreyfus and a new line being installed by ONEOK in early 2009 should alleviate this problem. We see continued growth in North Texas as the Barnett Shale exceeds expectations as a vital natural gas resource.

In Louisiana, exploration and development projects are underway statewide, and as Barry mentioned, our Crosstex LIG system is located where the action is. Crosstex LIG saw second quarter 2008 volumes consistently at about 1 BCF a day level. So business was and continues to be good. We are also continuing our efforts to integrate our Louisiana operations and use LIG to bring rich gas into our suite of processing plants. We are in the process of implementing several additional opportunities.

As we had mentioned to you before, an ongoing objective in Louisiana is to look for opportunities to better utilize our assets so they are more efficient and reliable. And during June, we shut down the Eunice plant for several days to make some repairs to improve the plant's overall efficiency. By doing so, we lowered Eunice's fuel consumption. Improving Eunice performance is one of the keys to our overall plant strategy in Louisiana and we believe we have improved the plant's efficiency and expect the plant's downtime will pay off in the long run.

During the recent Hurricane Dolly in the Gulf we temporarily lost some gas at our (Unis) and Sabine plants, but overall Dolly and in fact Edward were non-events for Crosstex. And as of today all of our plans are scheduled for pre storm flow volumes as flowing. So, in Louisiana we are integrating our strategically located pipelines system and processing plants for maximize the value from them. We are looking forward to being a major participant in the Haynesville Shale, and the impact that it will have on rigs already outstanding performance.

And I don’t want to leave the Haynesville Shale without discussing and reiterating what Barry said earlier about treating. Our treating division is in a great position to also benefit from the activity in the Haynesville. The combination of CO2 and the gas and expected high production volumes makes it an attractive play for treating. Right now we have three amine plants on the ground treating Haynesville Shale gas and construction is underway on two standard amine region units that are committed to major players in the Shale. We have three additional agreements pending and are pursuing several other agreements for even larger amine treatment plants. The Haynesville would be an important piece of our on goal road for treating.

Now back to Texas, and East Texas in particular, our Harrison County system were our second quarter throughput averaged about 55,000 MMBTUs per day, which included flow into the new loop at the Eastern end of our system that we completed during the quarter. In addition to the new loop we also started up a new refrigeration plant on the East side of the system and since then we had completed a second refrigeration plant which treats gas on the Western end of our system and began operating in July.

When we look forward to our East Texas assets benefiting from the Haynesville Shale activity as well, we can't yet define how this new coil will affect us in Harrison County, but what we do know is that our assets are well positioned so we can take advantage of Haynesville growth. No matter where the activity and we are confident drilling will remain strong in the region over the long-term, our East Texas facilities will benefit.

We are updating our prior development plans in East Texas to account for this, so we can capitalize on expected growth from the Haynesville. However, operations in South Texas and Mississippi remained solid. Drilling activity is strong and numerous new prospects continue to be evaluated for connection.

Now I will turn the call back to Barry.

Barry Davis - President, Chairman and Chief Executive Officer

Thanks you, Bob. After listening to our update, I think you can see that we are executing the strategy that we laid out. And we continue to focus on the opportunities around our core systems. The activity surrounding the Haynesville Shale will have far reaching effects on our treating division and our Louisiana and East Texas systems and create many great opportunities for growth.

To emphasize the potential impact of the Haynesville, I will remind you that in our pre Haynesville guidance, we expected less than $10 million per year growth investment opportunities in Louisiana. While it is still early, I think it is safe to say that the opportunity will grow substantially.

Before I close, I want to elaborate on what I said earlier about adding some significant resources to the Crosstex Team. To join our already outstanding team we have brought two industry leaders on board, Frank Billings our Senior Vice President of Commercial and Stephen McNair, as Senior Vice President of Business Development. We announced their appointments in July. Frank and Stephen have more than 40 years of combined midstream sector experience. This was a combination of a company wide structural evaluation and specifically an assessment of our commercial team that lasted several months.

In response to increased drilling activity across our systems and the overall robust industry environment, we believe that it was the opportunity type to move forward by putting our plan into action and strengthening our resources. Frank and Stephen compliment our already strong team at a pivotable point for Crosstex's growth. We are excited about the expertise and capabilities they bring to the table and our drive for commercial excellence. Frank and Stephen will help us improve the performance of our existing business by enhancing returns and help lead the charge to capture new opportunities on all fronts.

Our organizational changes give us additional capabilities to fulfill our overall primary objectives, which includes strong project development, a greater concentration on downstream marketing, expansion of our NGO, this is in consistent best practices in gas supply. We believe the undivided attention we’re giving commercial will help at greater value to the bottom line. So we can meet our strategic gross targets in 2008 and beyond. Crosstex has a strong competency seeing in organic growth, and we’ve boosted our resources to improve that performance. We are looking inward to maximize return on all businesses. In addition, given current capital market conditions were resetting our targets for additional returns as Bill mentioned earlier.

In closing I want to say that we are looking forward to fulfilling our plans as communicated to you during the second half of the year. It’s great to have an abundance of organic projects on our play and a great Crosstex team to execute. We are confident that this will add up to future growth and higher distribution in dividends. You know, that we at Crosstex are never happy just standing still, we are always in motion, continually working to improve the asset positions we have. Both the Barnett and Haynesville also are at the top of our priority list. The Barnett of course, is much further long in its development and we make sure we were part of that play by gaining a company making on trace from the very beginning.

We’ve brought tremendous value to Crosstex and our investors from the good work we’ve done and are doing there. Compared with the Barnett, the Haynesville Shale is in its infancy, but we’ve been there before so to speak and are confident we once again can capitalize on our first rate locations, favorable market conditions and strong industry relationship we build over the many years. The fact that we already have a far reaching top quality infrastructure in Louisiana gives us a significant competitive advantage in the Haynesville Shale.

We believe that the incomparable activity in North Texas Barnett shale is here for the long term, so we see our investment there resulting in even more value added growth in time. We expect these assets will continue to provide solid distributable cash-flow and returns. In Louisiana, we also are committed to growth and expect our operations there will remain an increasing contributor to cash-flow, and we envision even more growth on our smaller system like East Texas and in our treating division where we are taking advantage of our strategic positions.

All in all, we are excited about the opportunities reports on all fronts. Now I would like to turn the call back to our operator Laura, who will facilitate our Q&A session. Bill, Bob, Jack and I will be happy to answer any questions may you have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And your first question comes from the line of Darren Horowitz of Raymond James. Please proceed sir.

Darren Horowitz

Good morning guys. First question is on Louisiana side, when you were addressing your continuing efforts in order to integrate those operations and address an incremental rich gas. Can you give us sense for what opportunities have been implemented, what you’re considering in maybe kind of quantify the benefit of that?

Bill Davis

Darren this is Bill, good morning. Yeah there is several things being done there or have been done as well. Among them there is gas that became available to us on the acquisition, the assets from El Paso that we have been directing to the LIG facilities because there are more margins available for processing that gas then at LIG and the El Paso previously on facilities. There is additionally rich gas on LIG system that were taking to the Unis facility today for processing, because that’s the best available facility for that particular set of gas. There is the potential – the LIG system runs through both the Gibson and the Plaquemine plants and we’re examining possibility of looping that line because the Gibson plant is that above capacity, and there is available capacity at Plaquemine plants so we’re examining the feasibility of looping the line between those two facilities to get the gas from Gibson and to the Plaquemine facility. We are also looking at the possibility of things like moving the truck loading facilities that are used at River Side to the Plaquemine facility to preop capacity at River Side for fractionation because of its fractionator at Plaquemine that’s under utilize. So there are – and there are number of other opportunities that we’re looking at, and including there is a shortage of fractionation capacity in the area and we’ve got a fractionator available at Unis and there is just lots of opportunity that we’re continuing to examine to increase the utilization of those facilities.

Darren Horowitz

Okay. When you look at a lot of those different opportunities Bill and you advance over the course of the next 12 to 18 months inclusive of all gathering and treating in any sort of fractionation in East Texas and Louisiana. At this point, what do you think the preliminary forecast for your CapEx could be?

Bill Davis

Well, around those particular projects that we are talking about it's not that significant a number Darren. But overall though when you start to talk about our overall capital expenditure opportunity and you plug in the Haynesville, you can just some pretty big numbers from an opportunity set, it's a question of what the capital availability looks like around those things.

Darren Horowitz

Sure. It would seem like though if you include the North Texas cryo plant as well as that North Texas loop in addition to what you could also have gone on the East Texas, it would probably be a number that is well north of what you are going to spend this year, 250 million, correct?

Barry Davis

Darren, I think -- this is Barry. I think it would be correct to say that it could be more than that, but we are in an interesting time right now. I mean obviously the capital markets environment is different than what we have been in and we are just going to have to work through it. We have -- and what we have emphasized I think already in the call is the abundance of opportunities now we have to line those up with the availability of capital and specifically to Crosstex kind of where we are, and probably the emphasis is on the returns that we are able to see in these projects. At the right returns, there can be a lot more than what we have seen in 2008 as far as capital opportunities.

Darren Horowitz

Sure. And Barry, let me just ask you one final question, more big picture on what you just said. When you look at a lot of these opportunities and you look at all the capital that’s been spent to the drill bit specifically in that area, how far in advance do you want to be with capacity?

Barry Davis

We couldn't get very far in advance. I mean, we are already trying to keep up with the capacity that's required by the producers and Darren, I think it is very important to understand and essentially everything that we develop will be fully subscribed as we develop It that was the case in our last Red River expansion and will be the case in the 260 million expansion. There is gas waiting for the capacity as it's developed and anything else we do in the Haynesville we specifically expect that to be case. It will be pre-sold.

Darren Horowitz

Sure. Thanks. I appreciate it.

Barry Davis

You bet. Thank you, Darren.

Operator

And your next question comes from the line of John Edwards from Morgan Keegan. Please proceed.

John Edwards

Yeah. Good morning. Darren actually asked a lot of the questions that I had, but just adding on to that I am just curious with the Haynesville development, how do you see that impact and the attention that you are giving to other areas such as the LIG, SLG integration and the attention that you put on to the Barnett?

Bill Davis

Yeah John, it's a great question. And as long as I have been in this business that is the challenge that we are always faced with is kind of the next big thing. We have learned a lot of lessons in the past by getting too diverted to the next big thing. So we have taken great care to separate the teams. I mentioned earlier that we had to find a team is kind of our Haynesville focused team and we recognize the downside of being distractive out of the Barnett and we are not going to let it happen. So we just got to execute well with the experience that we have already had in that regard.

Barry Davis

And I will just say that, I think to add to a little bit what Bill said about our Louisiana team. What we want to accomplish in the future is total connectivity throughout Louisiana, so we now have combined what was originally a South Louisiana kind of processing team with the overall Louisiana team, we have got same gas and we have got all of people in the room, sitting at the same table, looking for opportunities and Bill named a few of them. That’s essentially the way we will treat the Haynesville. We will get the right people in the room and get them focused.

John Edwards

Okay, great. And then I know you touched on your opening comments and Darren was touching on the capital, CapEx expectation question. I mean, if you had to separate out Haynesville, is there any kind of additional what your capital spending expectations would be for that? And then also as far as timing, we keep hearing that even if rigs are available -- I mean rigs aren't really available so it's going to take some time to put to actually get these volumes flowing. So if maybe you could comment about that a little bit, that would be great?

Bob Purgason

Well as I said in the remarks we have plans for the remainder of 2008 of approximately 196 million of capital. Those are really good return projects and our spending on those obviously will be a function of capital availability in the capital markets, but we think because of good returns on these projects raising the capital should be an issue. Within that 196 million is the first 20 million to fund the expansions of 260 million a day that Barry mentioned for the Haynesville. That total project to fund that expansion is about a $150 million, so there will another 130 million around that to be funded in 2009. Also within that 196 million is another 50 million of good supplemental projects in North Texas that we have just put on the list this year or really in the last few weeks. Beyond that 150 million though in the Haynesville, with 20 million this year and 130 million next year we really haven’t defined the Haynesville capital program. Our Barnett Shale program for next year beyond the projects that we have already talked about has a change from what we have previously disclosed.

John Edwards

All right.

Jack Lafield

Yeah, there on the volume side -- this is Jack, on the volumes side for the Haynesville, we have focused with all our producers and find really that the growth of volume by the end of 2009 that we will see the volumes exceed the increased capacity that we could put in and others could put in timely. So though we talk about lack of rigs and a slower buildup, in our discussions with various producers we see that it’s going to be difficult for the midstream industry to keep up with what the things going to happen. But we are taking on the challenge and we have a plan and I think there is a lot of others out there that have some plans that we will try to meet that expectation.

John Edwards

Okay, great. And then any updates on some of the projects that you now said at the Analyst meeting back in April as far as any announcements there with those coming online?

Barry Davis

John, I would just emphasize that we continue to work all of those projects -- it’s very dynamic right now because of the things that we are seeing, the activities shifts that we are seeing, East Texas for example was one of the things that we have outlined. We see the Haynesville changes significantly kind of the overall look of East Texas, we have gone from trying to get a system from 50 million a day to 100 million a day, now it looks like it could be several 100 million a day that could be developed in that area, if the producers are right. So, we are still working on them, but I would say at this point no developments that we are ready to communicate.

John Edwards

Okay, great. Thank you very much.

Operator

Our next question comes from the line of [Sarah Titvo of White River Partners]. Please proceed.

Barry Davis

Hi, Sarah. Operator, can you hear her.

Operator

Sarah.

Sarah Titvo

Hi.

Barry Davis

Hi.

Sarah Titvo

I have a quick question on interest rate, or your interest expense, it can be a little low then I had expected, I was wondering, if you could comment about what your average interest rates was for the quarter and what you expected for the rest of the year?

Bill Davis

Yeah, floating rates were lower than we had budgeted for the quarter I think the average LIBOR in the quarter was -- for the three month LIBOR was in the range of 3 to 3.5, I don’t remember the exact number. And we had expected something more enough 4.5 range. So we did get that benefit in the quarter. We continue to budget at the higher level going forward. Also obviously, we had our hedge locked in most of our floating rate exposure at an average of 4.2% on the $550 million we have hedged for this year.

Sarah Titvo

Okay great thanks. And you did mentioned 50 million in North Texas projects, is this something new since the analyst day or these are projects including things you discussed on?

Bill Davis

No, these are new projects.

Saroh Titvo

Okay. Can you just talk a little more of that business?

Bill Davis

Bob, Jack, I will.

Bob Purgason

Yeah, basically there are expansion within our existing area of operations with new dedications from various producers that allow us to lay – to be the first mover into some key areas in Western County and Eastern Parker County and again these are areas that are rich gas. So areas that will – the gas will now be gathered for great opportunity in these areas but that actually take gas to our processing plants, and I think we are looking at initial volumes of 30, 40 picking a day peaking it about a 150 million a day coming through some new gathering systems. Also we entered into a arrangement with another producers to actually move some gas around from their network of systems that they have around through our existing pipeline to allow them better ability to move gas to the long lines or to the market lines, and so, we just entered into five year arrangement to do that, and so, we’ve seen a lot of -- again as Barry mentioned we are probably the key midstream player and once we build out the infrastructure that we have and we’re seeing that better utilization, better infrastructure and some new projects our return projects that get us into some of the newer drilling around the fort worth area.

Saroh Titvo

Thanks.

Operator

And next question comes from line of Sharon Lui from Wachovia.

Sharon Lui

Hi guys good morning. I was wondering if you could just clarify the new $150 million project in Haynesville is that you – I guess expand the Red River Lateral?

Bill Davis

Correct, that’s an expansion of our Red River Lateral that we laid a couple of years ago and its some of the immediate work that we can do on LIG, its primarily compression, additional compression with a small section of looping that we have to do to give us that increase capacity and that will take the capacity up to above 500 million a day, if you would recall the original Red River Lateral was about 240 million a day of facility, and then we heard this morning that we’re moving 251 and this is an additional 260. So we are about 500 million a day of new capacity and obviously since we acquired LIG of new capacity on the north part of the system.

Sharon Lui

And when is the target and service for the capacity?

Bill Davis

This is staged in capacity, we see 25 million a day going into service September 1. We estimate that we will put another 100 million a day in service in April of next year, and the last 125 million a day capacity going in service this time next year. A lot of that is based on obviously the equipment and getting pipe in place, but we’re pretty strong on those in service states.

Sharon Lui

I guess, what are you, I guess, assuming in terms of returns giving your higher hurdle rates?

Bill Davis

Sharon, it’s probably for competitive reasons, we wont get very specific around those numbers, but they are well and excess of cost capital.

Sharon Lui

Okay. Maybe you could just comment on the competitive landscape in Haynesville and have may be your strategy differs from I guess, the DCP midstream

Barry Davis

Yeah Sharon, let talk little bit about – there is a lot of activity right now and positioning if you will for the first volumes that are going to come out of the Haynesville, I think you can gets some really higher production numbers out of the Haynesville will over the next three to five years depending on who you are talking to, but we do think that our position there will give us the first volumes to come out. For example, we could sell multiples of the 260 million of new capacity that we’re going to be able to create in and describe the expansion of LIG. So -- but we do think it's important to be first, we think we have an advantage again because we can stage the capacity expansion. There is possibility of expansion well above the 260 just by continuous feed bowel making and looping of the LIG system.

And then ultimately, obviously, there is a large transmission opportunity to build out of there. When we look at it from a competitive standpoint, we think our presence there, the staged ability for capacity additions, and then also we have a an intrastate status in Louisiana which allows us to build facilities more quickly than a new entrant into the play for example, if someone came in without a regulatory status then they would have to essentially be handling the Haynesville new gas an interstate pipeline. And so, and even for existing interstate pipelines they would also have to go through the certification process which could would extend the much longer as far us getting a project in service then what we can do. So I am not familiar specifically with DCP as you mentioned the -- so in fact, we wouldn’t comment on any particular individual projects, we just say that we are in his equal good position with anyone out there and much better position than most.

Sharon Lui

Okay terrific. Thank you.

Barry Davis

I would comment Sharon just a little further another area that we look at is our treating business in the Haynesville. Because of what we’ve done over the last 10 years in building the inventory in treating the relationships that we have and just really of all leading position in treating we think that we will have an advantage there, we do have a Haynesville specific expanded strategy in treating where we are trying to plan with the producers on the most efficient way to build capacity here for treatment. Historically most of the treating is done kind of well ahead, we think there will be some opportunities for very large consolidated plans and we are working very closely with the producers. So that will be an area to watch closely as well, I think it can be a kind of separate from our LIG expansion.

Bill Davis

I think I would add one thing to that Sharon and that’s somewhat to what we said to you about the Barnett is that after we described our competitive position relative to other players we also said there is going to plenty of business for everybody which has come to pay us and the Haynesville is going to be the same thing if the producers are right about the size what that production is going to be, there is going to be lots of opportunity for a lot of players.

Sharon Lui

Okay, thank you.

Operator

And your next question comes from the line of (Inaudible) of Hearts Capital. Please proceed.

Unidentified Analyst

Thank you, good morning everyone. Just a quick, I was wondering if you can add some color or in the comment that the capital is adequate through 2009 in light of the amount of top excess plan through 2009. How much of that will be come from debt and do you think you need to enter the equity market sometime during now and in the end of next year?

Bill Davis

Between now and end of ’09 I would guess we would enter the equity markets, but we think our debt position is comparable now and we have the ability to access the debt markets to further fund what we’re going to be doing. So I would say sometime in the next 18 months yeah, we will be in the equity market, wouldn’t try to pinpoint a specific time now.

Unidentified Analyst

Approximately how much debt you currently have available in your lines of the credit facilities?

Bill Davis

We got currently available about 200 million.

Unidentified Analyst

Thank you very much.

Bill Davis

Okay.

Operator

And your next question comes from the line of John Edwards from Morgan Keegan. Please proceed.

John Edwards

Yeah, hi, just a followup. Regarding you’re talking about your pipeline capacity out of the Haynesville I guess, my question is do you expect to be involved with of that, are you going to stick primarily with the gathering, treating and the processing. And then also what do you -- where would you expect that pipeline ought to go, I mean, it – lots of pipelines in the area are full, just kind of curious your thoughts on that.

Bill Davis

Well, I think you know that the our bread and butter business is gathering and processing and treating and remaining as in intrastate, we have a lot of markets in Louisiana that we have to provide gas for long term. So one of the key reasons we laid are Red River Lateral in North Louisiana first place was to access the increased drilling in the Cotton Valley in that area to be able to pull that gas to our markets. In fact, this gas will lower down and reaches the Baton Rouge river area or we serve down a lot of other major markets. So we see obviously our – what we’ve learnt and what we are doing and performing and we’re actually executing quite well in the Barnett Shale with building gathering lines, compression, putting processing plant, treating facility then, that’s the area that we’re focused on today. On the long line something is built out there. Sure, we are looking at opportunity there to take gas out, we’re looking at where to go, and we’re actually maybe looking at project that downstream there, that would enhance the capabilities of producers to take their gas to new markets, they’re developing along the Southeast area. So all of those projects are very much focus of ours, but I will say that the highest priority is obviously the thing that we do the best and that’s the – that’s the I call, the upstream, midstream which is the gathering, processing treating and in this area its going to be enormous opportunity for us.

Barry Davis

And Jack I would explain it to say that the regional transmission, I mean, we see that the gathering, treating processing right in the Haynesville field area, but getting this gas to the hub area is kind of first step and we would clearly see our role is being involved in that as part of the service.

John Edwards

Okay great. And then earlier you made some comments about albeit regarding there is a lot of different things you’re looking at in having your Louisiana assets you ramp up the utilization on those you’ve got spare capacity in some areas and no capacity in others and I am just curious where – given Haynesville, what’s the timing when you would expect those assets for spare capacity that you will have those ramped up to full utilization?

Barry Davis

That’s a difficult question, I mean, full utilization, you know, it varies from one area to another throughout our system, but I think what I would like to do is get you to understand just the premium optionality that we have, the assets that we have throughout Louisiana. It would be difficult to say for example, how impactable the Haynesville gas is going to be moving gas all the way back down in the South Louisiana to serve our intrastate markets. So I think the key really is to understand, in fact, energy transferred has talked a lot about their diverse system in the intrastate in Texas, and I think similarly we have that type of an asset in Louisiana and in our expanding it now with the addition of the Haynesville development.

John Edwards

Okay, great thanks.

Operator

(Operator Instructions). And your next question comes from the line of James (Jimpel) from Highs.

James

Hi, the risk of beating a dead horse here on the capital side for the rest of the year. Given the fidelity of the capital markets and your availability and especially given the low trading price of the LP units. Are you seeing at about anything creative vis-à-vis using the GP as a financing vehicle if there were capital needs in the second half of this year?

Jack Lafield

I would just say we have a lot of options on the table and we haven’t ruled any of the them out and that’s certainly an option that’s on the table.

James

Okay, fair enough. And then on the C how do we think about any tax liability in the out years, how do you manage to keep the tax liability zero along the way so far?

Jack Lafield

That’s – well obviously the tax position is fairly complex animal, but I think basically you could say that as we’ve developed organic projects and the partnership the tax deprecation that is generated in the first year service of each of those project as resulted in an allocation of depreciation expense for tax purposes to the corporation that has kept the NOL in place and minimize the tax liability. Right now we can project as I said earlier that that’s going to continue through 2010. If we continue to develop organic projects which is our plan, it probably could extend beyond that timeframe under current tax law.

James

Thank you.

Operator

Sir you have no questions at this time.

Barry Davis

Okay, thank you Laura and thank you everyone for being on the call today, its always good communicating with you. If there is anything that you have afterwards feel free to call Bill or anyone works with him. We look forward to communicating with you as we go throughout third quarter, and again thank you for your support that allows us to continue to do what we do. Talk to you soon.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Have a great afternoon.

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