DENVER Jun 15, 2015 (Thomson StreetEvents) -- Edited Transcript of MarkWest Energy Partners LP earnings conference call or presentation Wednesday, May 6, 2015 at 4:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Frank Semple MarkWest Energy Partners LP - Chairman, President & CEO * Nancy Buese MarkWest Energy Partners LP - EVP & CFO * John Mollenkopf MarkWest Energy Partners LP - EVP & COO * Randy Nickerson MarkWest Energy Partners LP - EVP & Chief Commercial Officer ================================================================================ Conference Call Participants ================================================================================ * Gabe Moreen BofA Merrill Lynch - Analyst * Shneur Gershuni UBS - Analyst * John Edwards Credit Suisse - Analyst * Jeff Birnbaum Wunderlich Securities - Analyst * Jerren Holder Goldman Sachs - Analyst * Sunil Sibal Global Hunter Securities - Analyst * Helen Ryoo Barclays Capital - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to the MarkWest Energy Partners first quarter 2015 earnings conference call. (Operator Instructions) This call is being recorded. If you have any objections please disconnect at this time. I will now turn the call over to Mr. Frank Semple, Chairman, President and Chief Executive Officer. Thank you, you may now begin. -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [2] -------------------------------------------------------------------------------- Good morning and thanks to everyone for joining us on the call today. Our slides can be found on our website and we invite you to read the disclosures on Slides 2 and 3. As indicated, our discussion today will include forward-looking statements and actual results may differ materially from our expectations. Factors that could cause actual results to differ are included here as well as in our filings with the SEC. So with those preliminaries out of the way, we are off to a very strong start in 2015. We reported another solid quarter and our focused execution in supporting producers' development of America's most economic resource plays. Now while we remain in a challenging commodity environment, our top priorities continue to be aggressively managing our capital expenditures and working with producers as they optimize their drilling programs. Our goal is to complete new projects on a just in time basis which results in the increased utilization of our facility as well as maximizing operating income and Bcf per unit. Our projects are being constructed at the request of our customers and are backed by long-term fee based contracts with significant acres dedication and minimum volume commitment. This year, we're on track to commission 11 new facilities which will add 1.5 billion cubic feet per day of processing capacity and more than 80,000 barrels per day of fractionation capacity. The long-term growth outlook for shale resource development is tremendous and our position as a leading midstream provider in seven major resource plays continues to drive new organic growth opportunities. On Slide 4, we provided our first quarter highlights. Total system volumes set a new record reaching 5.4 billion cubic feet per day, increasing an impressive 52% from the first quarter of last year. I'm proud to say that we are now the second largest processor in the United States. First quarter DCF was $180 million and adjusted EBITDA was $230 million and we increased our quarterly distribution to $0.91 per common unit while maintaining a coverage ratio of 1.06 times. Our results reflect the durability and diversity of our business model and we've grown to become one of the Top 10 largest MLPs. Our significant growth program continues and we are expanding our footprint in both existing and new areas. We currently have 19 major infrastructure projects under construction and over the next two months we will complete three of these projects increasing our total profits and capacity to over 6.5 billion cubic feet per day. Moving to Slide 5, our Southwest business unit continues to deliver strong performance. Processed volumes increased by 21% compared to the first quarter of 2014 and utilization of our facilities averaged 83%. In East Texas our 520 million cubic feet per day of processing capacity remains fully utilized. In order to continue supporting producers' development of rich gas areas of the Haynesville and Cotton Valley, today, we are excited to announce an expansion of our Carthage facilities by an additional 80 million cubic feet per day which will become operational by the third quarter of this year. In Oklahoma, our assets in the Granite Wash and Woodford shale continue to deliver solid results and our processed volumes increased 16% from the first quarter of last year. In February, we announced a new commercial agreement with Newfield Exploration to support their development of the STACK play in the Cana-Woodford. We have already completed 13 wells to our new gathering system and this month, we anticipate completing a new 60-mile high pressure pipeline to transport rich gas to our Arapaho complex in Custer County, Oklahoma. We have a long and successful relationship with Newfield and we're excited to expand our system into emerging areas of the Anadarko Basin where they have over 300,000 net acres and 5,500 identified potential drilling locations. Transitioning to our Marcellus operations on Slide 6, we continue to achieve record growth at our five major processing complexes in Pennsylvania and West Virginia. Processed volumes for the first quarter exceeded 2.8 billion cubic feet per day increasing by an impressive 1.2 billion cubic feet per day from the first quarter of last year and 300 million cubic feet per day from last quarter. As a result of the continued growth, our processing capacity was 90% utilized for the first quarter. Our exceptional volume growth is the result of 14 producer customers who continue their significant development programs in the highly economic areas where we operate. The Marcellus is the largest producing gas field in the US and 90% of the rich gas rigs are operating in the core acreage of southwestern Pennsylvania and northern West Virginia surrounding our processing and fractionation facilities. In fact, MarkWest is currently processing 90% of the gas from this highly prospective area. For 2015, we forecast another year of exceptional growth with year-over-year processed gas volumes growing by 50%. And as you can see on Slide 7, we have updated our Marcellus project map to reflect the 15 major projects currently under construction. We continue to work with producers to complete our facilities to match their production forecast and we currently expect to complete eight facilities this year. These startups will increase our total processing capacity to 4.1 billion cubic feet per day and fractionation capacity to over 350,000 barrels per day. In addition, we continue to expand our gathering systems to efficiently deliver our producers' growing gas and NGL production. Marcellus Shale is truly an unrivalled resource play and our facilities are critical to ensuring the ongoing success of our producers. Moving to the Utica operations on Slide 8. Volume growth at our Cadiz and Seneca complexes remains strong and utilizations are increasing. Processed volumes more than doubled from the first quarter 2014, increasing by half a billion cubic feet per day. Since last quarter, our average volumes increased by 16% or 100 million cubic feet per day. Utilization also reached a new record, exceeding 80% and we expect full-year Utica process volumes will increase by approximately 95%. On Slide 9, you'll see a map of our Utica operations. Since 2012, we've developed the most comprehensive and fully integrated midstream system in Ohio. Our assets include 925 million cubic feet per day of processing capacity, 160,000 barrels per day of fractionation capacity, and an extensive rich and dry gas gathering system spanning nearly 400 miles. This year, we will increase our total Utica processing capacity over 1.3 billion cubic feet per day with the completion of two new plants. In addition to completing new infrastructure in the Utica, we also continued to add to our high quality set of producer customers. Today, we're excited to announce new long-term fee based agreements with Rice Energy to support their development of acreage in Belmont and surrounding counties and we now support 20 high quality producer customers in the Marcellus and the Utica. Moving to Slide 10, we've included a combined overview of our Marcellus and Utica fractionation operations. We currently operate 192,000 barrels per day of propane and heavier fractionation capacity at our Houston, Hopedale and Keystone complexes. Total propane and heavier volumes during the first quarter reached their record 157,000 barrels per day and our fractionation facilities were 82% utilized. Just four months ago, we began operations of our second facility at the Hopedale complex in Ohio increasing our fractionation capacity at the complex to 120,000 barrels per day. Our Houston and Hopedale facilities are connected by a large Y grade pipeline system and we fractionate the NGLs produced from both our Marcellus and Utica operations. The Hopedale and Houston complexes will be fully utilized by early 2016 when we will commence operations of a third 60,000 barrel per day fractionator at Hopedale. We also continue to expand our fractionation infrastructure at the Keystone complex and we expect to bring online 31,000 barrels per day of additional capacity in the fourth quarter of 2015. We expect our total year-over-year fractionated volumes in the Northeast to grow by 50% in 2015 as producers continue developing their rich gas acreage positions. Northeast NGL production is dramatically reshaping the domestic and international energy economy and there continues to be significant opportunities to develop transformative solutions. Since 2008, we have been working closely with our producers and downstream customers to develop critical infrastructure in the Northeast that will help achieve the maximum value of the NGL barrel. Our world class truck, rail, pipeline, barge and international export solutions support the efficient transportation and marketing of our producers valuable NGLs. Given the scope and scale of our Marcellus and Utica operations, we are taking a leading role to ensure that future downstream projects will enhance the productivity of the Basin and achieve the highest price for our producers' NGLs. During the first quarter we commenced operations of our new 20,000 barrel per day condensate stabilization facility, which is currently supporting Gulfport Energy and other producers. Condensate solutions in the Utica have become increasingly important. Our facility will serve as the origination point for Marathon's Cornerstone pipeline and it will supply stabilized condensate and other NGL products from our Hopedale complex to Marathon's refinery in Canton, Ohio and other downstream markets. Our facility is the largest of its kind in the Utica and we believe this is an important progression in connecting Utica and Marcellus NGLs to refinery and petrochemical markets. On Slide 11, we've included a high level overview of our Marcellus and Utica operations. We've invested over $8 billion to develop fully integrated midstream solutions and today, we processed approximately three-quarters of the rich gas production from the entire Northeast. The success of our producer customers is leading to the continued expansion of gathering, processing and fractionation infrastructure in Pennsylvania, West Virginia and Ohio. We remain committed to supporting producers with the largest and most capable midstream systems in two of the most productive and economic gas resource plays in the US. Slide 12 shows the direct result of our significant capacity expansion and ongoing success of our customers. We forecast total processed volumes in 2015 will exceed 5 billion cubic feet per day. This represents growth of 400% for an incredible 4 billion cubic feet per day since 2011. It's exciting to consider that over this time frame, we have grown from the tenth largest to the second largest processor in the US. Transitioning to Slide 13. Our 2015 DCF forecast remains at a range of $700 million to $800 million while adjusted EBITDA remains in a range of $925 million to approximately $1 billion. 2015 capital remains at a range of $1.5 billion to $1.9 billion and we forecast 2016 CapEx will be approximately $1.5 billion. We continue to optimize our capital program by matching the completion dates of new facilities with our producer requirements. This just in time objective results in higher utilization of our facilities and improved both areas of both our overall operational and financial performance. Given the current environment, we've also experienced a reduction in construction through contract costs of approximately 20% to 30% and we've been able to capture savings by rebidding projects and working closely with our vendors. Our fee based margin continues to increase and for the full-year 2015, we are on target to reach 90%. For the remaining portion of commodity exposed margin we are currently hedged at over 50% for 2015 at a weighted average price of approximately $0.70 per gallon for C3 plus. Concluding on Slide 14. Today, we have liquidity of $1.4 billion and are undrawn on our revolver. In February, we successfully completed a $650 million add-on to our November 2014 senior notes offering at a yield of 4.66%. Including those two bond offerings and the significant equity pre-funding we completed in the fourth quarter of last year, we have raised over $1.7 billion in the past six months. As a result of our strong liquidity position, we did not raise any equity in the first quarter. Our distribution forecast remains unchanged and we expect distributions of approximately $3.70 for 2015, $3.97 for 2016 and an annual growth rate of 10% for 2017 to 2020. We anticipate the annualized distribution coverage ratio during the entire period will be between 1 and 1.2 times. So in closing, we are well-positioned to continue executing on behalf of our customers and deliver sustainable long-term returns for our unit holders. With that, Vince, I'll open it up to questions. And I have Nancy, John, Randy, and Greg Floerke, the newest member of our executive team to help me with the answers. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you, Sir. (Operator Instructions) Our first question comes from Mr. Gabe Moreen. -------------------------------------------------------------------------------- Gabe Moreen, BofA Merrill Lynch - Analyst [2] -------------------------------------------------------------------------------- Hi, good morning, everyone. Question on the ATM program and the decision not to issue equity this quarter given the strong liquidity position. Should we read anything into that for the rest of the year in terms of ATM issuance? Obviously, your liquidity is still pretty strong here coming out of the first quarter? -------------------------------------------------------------------------------- Nancy Buese, MarkWest Energy Partners LP - EVP & CFO [3] -------------------------------------------------------------------------------- Yes, Dave, this is Nancy. You shouldn't read anything into that other than we have significantly pre-funded as we mentioned in an earlier call about Q4. We did a lot of equity funding and great unit prices in Q4. We did the bond deal and then we did the add-on bond deal. So, we've got quite a lot of liquidity and we are undrawn on our revolver at this time. We just did not have a need to go out and hit the equity markets in Q1 and we've still got a little bit of room to move. But we will issue equity opportunistically as we always have and the predominant vehicle for that in 2015 will be our ATM. -------------------------------------------------------------------------------- Gabe Moreen, BofA Merrill Lynch - Analyst [4] -------------------------------------------------------------------------------- Understood. And then, in terms of volume expectations here in the shoulder season, clearly there's been some announcements from Marcellus producers about potentially shutting in exiting flowing gas although that seems to be away from where the regions you're located. Could you just speak to that in terms of what you're hearing from producers in your neck of the woods, whether there's any expectation at all on your part where volumes are going to be some volume shut-ins in Q2 or Q3? -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [5] -------------------------------------------------------------------------------- Gabe, the producers, and I'm sure you have listened to their public comments, they are really excited about the results both -- continuing to be excited about the results both in the rich and dry gas areas of the Marcellus and Utica. They are clearly trying to manage their drilling programs and CapEx even with really good returns from their wells. They're managing their CapEx and their drilling programs based on available downstream markets, available pipeline capacity to downstream markets. So that's really the gating element for the producers across our area of operations. And as you know, Gabe, we are always very closely connected with our producer customers. We get all their information relative to not only their operations but also their commercial development, their plans and their netbacks. And so, we have baked into our guidance all of that input. I will say that really we're not seeing shut-in gas, our area of operations, either in the rich or dry gas areas. What you're seeing is producers deciding to optimize their drilling program into the best acreage, optimizing their [ABP] objectives and in some cases, they are drilling and choosing not to complete wells based on the timing of downstream capacity. So there's kind of a wide range of issues out there but you need to make sure that you understand that all of those considerations and the expectations are really factored into our guidance that we provided and will continue to provide as we move throughout 2015. -------------------------------------------------------------------------------- Gabe Moreen, BofA Merrill Lynch - Analyst [6] -------------------------------------------------------------------------------- Right. Thanks, Frank. And last question for me, is just in terms of the CapEx guide and maintaining it. Two parts of this question. One is, would it be fair to say you might have lowered 2015 CapEx forecast were it not for the Rice Production deal and then also the East Texas processing expansion? So again, absent those, would you have lowered CapEx for 2015? And then given that 20% to 30% cost savings, which I know you also talked about on last call Frank, can we think about maybe going to the lower end of that guidance as far as your 2015 budget? Just wondering given those cost saves if that's where you're headed? -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [7] -------------------------------------------------------------------------------- Well, Gabe, let me give you a quick response and then I'm going to turn it over to John Mollenkopf to help give you color around how we're managing our CapEx. But you are exactly correct. If you look at the 2015, and also the 2016 CapEx forecast, you have a number of variables that are driving the continued updates that we're providing for CapEx. We have all of the efficiencies and the just in time program that John will talk. But we also have new projects that are coming up that are driven by both new customers like Rice as well as changes and modifications and expansions to our existing producer customers in our area of operation. So there are tradeoffs and we are, as I mentioned in my formal comments, we are doing everything possible to optimize that CapEx, to push it down lower into that range. But also to keep in mind that we are very, very focused on making sure we don't get behind the curve with our producer customers. That's really critical. In all this optimization we've also got to understand that we've got to stay ahead of the producer customer and make sure that we are meeting their requirements but obviously, optimization is job one. So, John, you want to add a little bit of color? -------------------------------------------------------------------------------- John Mollenkopf, MarkWest Energy Partners LP - EVP & COO [8] -------------------------------------------------------------------------------- Yes, just to reemphasize some of the points Frank made. With the producers revised and evolving drilling plans, we've been able to stretch out a couple of projects along the way and save a lot of money on the construction side by not working significant overtime. And we were also very successful at rebidding some of the construction side of our projects for this year in the first quarter and have realized some pretty significant savings. As Frank mentioned, we also have some new projects that are coming into the mix. Overall though, we're trending towards that mid range of that capital guidance. -------------------------------------------------------------------------------- Gabe Moreen, BofA Merrill Lynch - Analyst [9] -------------------------------------------------------------------------------- Great. Thanks, everyone. -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [10] -------------------------------------------------------------------------------- Thanks, Gabe. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Thank you. Our next question comes from Mr. Shneur Gershuni. -------------------------------------------------------------------------------- Shneur Gershuni, UBS - Analyst [12] -------------------------------------------------------------------------------- Hi. Good afternoon, everyone. I guess my first question I just wanted to continue on some of the questions that Gabe had. With respect to the CapEx savings, is it fair to assume that you maintain the benefit on the returns and that you don't have to share that back with who your contracting with, correct? -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [13] -------------------------------------------------------------------------------- That is correct. -------------------------------------------------------------------------------- Shneur Gershuni, UBS - Analyst [14] -------------------------------------------------------------------------------- Okay, and then when you talked about optimizing how you layout the CapEx and so forth, you have this contrarian outcome where if you actually slowed CapEx, based on my numbers, your cash flow would actually improve significantly. And you talked about the outcome where producers are looking at drilled uncompletes and trying to optimize how they do things. Are you trying to take steps or is it available to be able to potentially push out some of your CapEx for a short period of time to allow cash flow to catch up to your CapEx while at the same time being able to service your customers given the fact that you have this odd environment where they're looking to drill but not complete wells? I was wondering if you could talk to that a little bit? -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [15] -------------------------------------------------------------------------------- Well, absolutely. The result of this optimization and the just in time program that we have talked so much about, is that it drives up utilizations of the facility and it improves the margins, if you will, because we're operating at a higher volume, higher utilization, receiving more cash flow from a fixed amount of capital. So we are -- the fact is that over the past five years because of the trajectory of growth in the Marcellus and the Utica, we have, it has been necessary for us to build out significantly ahead of the producer customers which has made it harder to reach that magic 80% to 100% utilization that's really critical for returns. And so, in a way, this optimization that we've talked so much about is allowing us to slow things down a bit. Again, we've got to be careful not to overreact, but it allows us, as John said, to slow things down a bit, plan better for the construction and end service date for these projects, these large processing fractionation pipeline projects. And when the wells come on, they will essentially fill those plants a lot quicker or fill the capacity a lot quicker. So that is a result of this slowdown, so to speak, as the producers try to maximize their capital and reach the best markets for the best netbacks. I will say again, I mentioned this last quarter, that this is a real dynamic planning process. The producers have been great to work with. We have daily, weekly, monthly meetings with the producers to continue to modify, revise these plans so that we can come closer together with our projects and their volumes. Hopefully that answers your question. -------------------------------------------------------------------------------- Shneur Gershuni, UBS - Analyst [16] -------------------------------------------------------------------------------- No, it definitely does. And one last final question if I may? Balance sheet, you quoted a leverage ratio of 4.4 times. Historically, you've been fairly conservative with the balance sheet. Are we in a new era a little bit where you're willing to tolerate a little bit more especially given the amount of liquidity that you currently have available in terms of trying to help returns and so forth? I was wondering if you can talk to how you're thinking about it as the year unfolds? -------------------------------------------------------------------------------- Nancy Buese, MarkWest Energy Partners LP - EVP & CFO [17] -------------------------------------------------------------------------------- Sure. We've stated before our objective of trying to be around 4 to 4.5 times levered, moving more towards the 4 times into that range. However, there are definitely situations from time to time where you will see us lever up a bit, greatly dependent on market conditions. This first quarter is a great example of that where we had the opportunity to get out and do an add-on bond offering that we did end up upsizing at a great yield. And so, that's just one of those circumstances where we are absolutely willing to tolerate a little bit notch up in leverage in order to get some liquidity and to fund our capital program at a great cost to capital. So we will do that from time to time but our stated objective is still in that moving towards the lower 4 range. -------------------------------------------------------------------------------- Shneur Gershuni, UBS - Analyst [18] -------------------------------------------------------------------------------- Great, thank you very much, guys. -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [19] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Our next question comes from Mr. John Edwards. -------------------------------------------------------------------------------- John Edwards, Credit Suisse - Analyst [21] -------------------------------------------------------------------------------- Yes, good morning, everybody. Congratulations on another nice quarter. Frank, just what's your average contract durations now on your projects? -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [22] -------------------------------------------------------------------------------- Well, John, obviously it depends on the type of a project. -------------------------------------------------------------------------------- John Edwards, Credit Suisse - Analyst [23] -------------------------------------------------------------------------------- I mean gas processing and fractionation. -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [24] -------------------------------------------------------------------------------- Yes, again, I'll ask John to come give you some color here. When we start the planning process with our producer customers and we ultimately kick off that project based on signed contracts, and as I said in the past, it takes anywhere from 12 to 18 months to complete a gas plant project. We've been able, recently, we've improved on that. But again, keep in mind that we're dropping in these skids at existing facilities and sometimes that makes it very much more efficient. Overall, you have the issue around long lead time material and then you've got the start date for construction, which John I believe would be in that 7 to 10 month time frame for the actual construction process. -------------------------------------------------------------------------------- John Mollenkopf, MarkWest Energy Partners LP - EVP & COO [25] -------------------------------------------------------------------------------- Yes, exactly. And again, with the flexibility that we've got now with the producers optimizing their drilling plans, like I said earlier, while we could put these projects in place earlier, we don't need to. And so, we're trying to match that just right so we spend really an optimized amount of capital on the projects. -------------------------------------------------------------------------------- John Edwards, Credit Suisse - Analyst [26] -------------------------------------------------------------------------------- Okay, so are you typically -- I'm just curious where are we overall? Is it around 5 years, 10 years? -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [27] -------------------------------------------------------------------------------- Now John, are you talking about construction contracts? Are you talking about --? -------------------------------------------------------------------------------- John Edwards, Credit Suisse - Analyst [28] -------------------------------------------------------------------------------- No, I'm talking about the operating contracts. I mean you're typically doing pretty long duration. You've got various maturities on these but your operating contracts, aren't you running something like 10 years or so now on average? -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [29] -------------------------------------------------------------------------------- Exactly. They're 7 to 15 years in the Marcellus and the Utica. That's on purpose. We really evaluate where we want to be from a term standpoint with our producer customers depending on the quality of the resource, the economics and many other considerations. But we're kind of in the sweet spot of that, like I said, 7 to 15 years. -------------------------------------------------------------------------------- John Edwards, Credit Suisse - Analyst [30] -------------------------------------------------------------------------------- Okay, and the way you've been developing, you've got staggered end dates on these. So it should be something pretty easy to manage it sounds like for many, many years just the way it's coming together. Is that a fair way to look at it? -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [31] -------------------------------------------------------------------------------- Well they're staggered John, but also, we start very early with our producer customers to plan for those rollover of contracts. Obviously, we've got a significant amount of infrastructure and support and relationships with our producer customers. And they, like us, want to start early, are anticipating the termination dates of those contracts to develop the optimum solution for contract structure going forward. -------------------------------------------------------------------------------- John Edwards, Credit Suisse - Analyst [32] -------------------------------------------------------------------------------- And then, as far as the utilization ranges, you've done a outstanding job here on getting those utilization levels higher and higher and obviously, it sounds like it's quite the juggle to try to do that. Just in terms of ranges to think about it maybe for our own modeling purposes, where do you think you'll -- what's a reasonable assumption to make going forward of where you think you'll be -- or should we think 80% plus? Should we think 80% to 90%? It's obviously, a difficult thing to balance, but just how should we think about that? -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [33] -------------------------------------------------------------------------------- The percentage you should use, John, in the Marcellus is 90%. I think it's a good target. And the reason that I differentiate the Marcellus from the Utica, is just because of the maturity of that play. We're able to -- we obviously have a significant infrastructure there, as I mentioned earlier, and we're able to manage this just in time program that we've been talking about more effectively and efficiently in the Marcellus because we've got more facilities, infrastructure, the producers are well into their drilling programs and it's really for them, it's manufacturing. So 90% is a good number and we would like to drive it 90% to 100%. Again, 80% to 100% is where our sweet spot is for margin on these investments. And conversely, over in the Utica, we're early into that play. The producers are early in their drilling programs and their land management. And so, you should probably use something more in the 75% to 85% range for the Utica. Again, for the same reasons, everything is that it's early in that play and it's harder to optimize when you're trying to just develop all these new facilities that the producers are just in the early stages of their development program with their acreage. Does that help? -------------------------------------------------------------------------------- John Edwards, Credit Suisse - Analyst [34] -------------------------------------------------------------------------------- Yes, that's really helpful. And then, I'm curious, coming back to the CapEx question that I think it was Gabe that brought it up earlier. So your able now -- so you're not really seeing that much in the way of deferrals per se. Its really been more of a cost savings from your own vendors and subcontractors and such. And there's also been a bit of a stretching out of the actual construction to meet the objectives of your customers. Is that the right way to think about it? So there may be a little bit less spending per year but there hasn't really been a change per se in the demand for your services. -------------------------------------------------------------------------------- John Mollenkopf, MarkWest Energy Partners LP - EVP & COO [35] -------------------------------------------------------------------------------- John, the savings that we're seeing is really a combination of both, deferrals and -- it's really, deferral may be a strong word, but lengthening out the project to match the drilling schedule as well as the savings that we're seeing. But that also leads to savings in the construction costs. The other thing that has really been saving us cost is just the fact that during the boom from the last five years, a lot of new contractors came into the market. And so, we have a lot of competition between contractors for the work that's available which is less than it has been the last couple of years. They are getting more aggressive on their bidding and giving us better prices. And it's really starting to show up on the bottom line. -------------------------------------------------------------------------------- John Edwards, Credit Suisse - Analyst [36] -------------------------------------------------------------------------------- That's really helpful. Thanks, that's it for me. -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [37] -------------------------------------------------------------------------------- Thanks, John. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Our next question comes from Mr. Jeff Birnbaum. -------------------------------------------------------------------------------- Jeff Birnbaum, Wunderlich Securities - Analyst [39] -------------------------------------------------------------------------------- Good morning, everyone. Just a couple follow-up questions on the Utica and CapEx. Apologies if I missed anything earlier. So Utica CapEx looks like it keeps coming down as a percent of total planning CapEx. I think it's now at 12% for the year versus a few months ago I think it was at maybe 20% or so. Any insight you can give on that trend and how you see the drill bit moving and any implications that may have for 2016 CapEx in the Utica? And then the second part of that question is, just any additional color you can give on the agreement you are discussing today with Rice? Frank, I think you mentioned that was in Belmont County. Is that in Eastern Belmont County, Western or just Belmont? Any other color there would be great, thanks. -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [40] -------------------------------------------------------------------------------- Sure, Jeff. The short answer on the CapEx question, the change, the reduction or the trending down of the Utica CapEx is pure and simple. It's a result of the combination of factors that John just talked about. We are as the volumes start to, are impacted by the reduction in the drilling programs in the Utica by the producers, both in the rich and dry gas area, then we are managing our facility and service dates and CapEx to better match when those volumes are going to require new facilities. So it's that just in time scenario as well as just the efficiencies that John talked about that we're able to achieve in this environment with our contractors and vendors. I'll ask Randy Nickerson to give you some color around the Rice agreement. -------------------------------------------------------------------------------- Randy Nickerson, MarkWest Energy Partners LP - EVP & Chief Commercial Officer [41] -------------------------------------------------------------------------------- Thanks, Frank. Really there are a couple of different Rice agreements that we've signed, Rice being just another one of the customers we appreciate in our core area. Rice is in the area where Gulfport operates in the dry area. They are one of the non-operators in those wells and they wanted to have a separate agreement and so we're able to sign those agreements. Again, it's for really production that matches Gulfport's production out of the dry gas areas. At the same time, they have acreage in the rich gas area in the Utica and so we're able to reach an agreement with Rice to dedicate all of their rich gas acreage in the Utica to our system as well. So it was a great contract. Rice is doing a great job and we're delighted to have them as one of our producer customers. -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [42] -------------------------------------------------------------------------------- Right, Randy, and to add to that, I think the -- important to also point out that Rice is a great operator. They are a great operator upstream, they're a great operator midstream. So they are very capable and have been very efficient and effective at building out all of their facilities. So obviously, we've got a good relationship with Rice and our model has been to work with the producers to really help develop a more efficient, in our case, midstream solution to be able to gather, process and reach good markets with their NGLs. So I think it's a win-win for both us and Rice. -------------------------------------------------------------------------------- Randy Nickerson, MarkWest Energy Partners LP - EVP & Chief Commercial Officer [43] -------------------------------------------------------------------------------- I agree. -------------------------------------------------------------------------------- Jeff Birnbaum, Wunderlich Securities - Analyst [44] -------------------------------------------------------------------------------- Thanks, guys. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- Your next question is from Mr. Jerren Holder. -------------------------------------------------------------------------------- Jerren Holder, Goldman Sachs - Analyst [46] -------------------------------------------------------------------------------- Thanks, good afternoon. Just wanted to touch on the Southwest segment here. With the commodity prices declining would think that this segment may be under a bit more pressure. But obviously, you guys are showing some strength with volume growth, 10%, 2015 or 2014 and certain subregions being essentially at full utilization. Can you guys talk a bit about the dynamics going on in that segment because obviously, we're seeing some competitors really struggle in the mid-continent and what not? -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [47] -------------------------------------------------------------------------------- Sure. Well the starting point for the results that we've seen in the latter part of 2014 and beginning part of 2015 in the southwest business unit, is a result of, I'll call it, the quality of the producers and the quality of the reserves. As you know, we continue to focus on all of our agreements on where the best rock is and where the best returns are for the producer customers. That being said, clearly, the commodity price environment and we have more exposure in the southwest to commodity prices than we do in the Northeast because of the types of contracts. Much of the volumes are keep-whole type agreements. The issue is that we're in the right places that producers continue, as you heard from my formal comments, they continue to do a great job of developing the high quality acreage and the volumes are increasing which is being offset by the lower commodity price environment. Obviously, a key part of that managing the impact of the commodity price environment is our hedging program. We're very aggressive at continuing to hedge to ensure that we minimize the downside for these sorts of cycles. It starts with you have offsetting impact, the positive impact of still very good operators operating at very good resource plays, offset by the lower commodity price environment which is being managed by our hedging program. -------------------------------------------------------------------------------- Jerren Holder, Goldman Sachs - Analyst [48] -------------------------------------------------------------------------------- Thanks, that's it for me. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- Our next question comes from Mr. Sunil Sibal. -------------------------------------------------------------------------------- Sunil Sibal, Global Hunter Securities - Analyst [50] -------------------------------------------------------------------------------- Hi, good morning, guys and congratulations on a good quarter. -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [51] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Sunil Sibal, Global Hunter Securities - Analyst [52] -------------------------------------------------------------------------------- Couple of clarifications for me. First, on the 20% to 30% savings that you mentioned. Does that 20% to 30% correspond to the construction part of the overall project? And if so, how should we think about it from an overall project cost perspective? -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [53] -------------------------------------------------------------------------------- Sure, Sunil, we've touched on this a little bit before. Again, I'll let John answer this question. Just as a little bit of an intro, the 20% to 30% is a range and an approximation that we made that we talked about last quarter. And it really is the most manageable part of that construction, overall construction costs, which are the contracts that we have with construction contractors that we're able to manage more effectively because of the timing of these projects. But John, do you want to add a little color here? -------------------------------------------------------------------------------- John Mollenkopf, MarkWest Energy Partners LP - EVP & COO [54] -------------------------------------------------------------------------------- Yes, so construction costs make up about two-thirds of a project's cost, somewhere in that range. So that's where we're seeing most of the savings. We also -- we've gotten very active on the procurement side and we've negotiated some very attractive deals because of the high volume that we have with materials vendors as well. So, but I think you can think about the construction side as being about two-thirds of a total project cost. -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [55] -------------------------------------------------------------------------------- (Technical difficulty). And so much interest in this whole issue of impact on overall project costs because of the environment and because of the optimization. So we're at our investor conference in June we're going to spend a lot more time deep diving into the full life cycle of a project and specifically how we're seeing the impact of all these factors, not only on the overall capital program but also for specific projects. So stay tuned for that discussion. -------------------------------------------------------------------------------- Sunil Sibal, Global Hunter Securities - Analyst [56] -------------------------------------------------------------------------------- Okay, that's helpful. I'll look forward to more detailed discussion on that. My next question was related to the hedges. I think you laid out 2015 how much of your volumes are hedged. Is it kind of fair to assume that a good chunk of those hedges were in the first quarter of this year? -------------------------------------------------------------------------------- Nancy Buese, MarkWest Energy Partners LP - EVP & CFO [57] -------------------------------------------------------------------------------- Yes, there were a decent amount in the first quarter. -------------------------------------------------------------------------------- Sunil Sibal, Global Hunter Securities - Analyst [58] -------------------------------------------------------------------------------- Okay, and then, really kind of looking beyond 2016 and 2017 in terms of your 10% distribution growth guidance. I think on the last quarterly call you had indicated that it was based on an $0.80 per gallon kind of NGL price environment. Is that still the assumption or is there any change in that view? -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [59] -------------------------------------------------------------------------------- As we look forward and we model our business including the distribution growth, one of the key variables, as you mentioned, is the assumption around commodity prices. Obviously, as we are providing updates to the public on our continued expectation around distribution growth, we look hard and continue to reevaluate that pricing assumption as well as all of the other key components, capital, volumes, et cetera. We still, obviously, feel confident that we could achieve that guidance given the forward curve of the current pricing for NGLs and natural gas. -------------------------------------------------------------------------------- Sunil Sibal, Global Hunter Securities - Analyst [60] -------------------------------------------------------------------------------- Okay, that's very helpful and that's all I had, thanks. -------------------------------------------------------------------------------- Operator [61] -------------------------------------------------------------------------------- Our last question comes from Ms. Helen Ryoo. -------------------------------------------------------------------------------- Helen Ryoo, Barclays Capital - Analyst [62] -------------------------------------------------------------------------------- Thank you, good morning. Just a couple of quick ones, So on the Southwest segment you show pretty good utilization and then you talked about expanding the Carthage floor plan. You're also connecting the Cana-Woodford system that's going to flow through your West Oak system which is currently relatively underutilized compared to the rest of your plans. So do you expect with everything you're doing down there, do you expect the utilization to improve going forward? Could you maybe talk a little bit about how you see that segment performing going forward? -------------------------------------------------------------------------------- John Mollenkopf, MarkWest Energy Partners LP - EVP & COO [63] -------------------------------------------------------------------------------- Yes, as Frank mentioned a little bit earlier, we're seeing a lot of successful drilling occurring in the Southwest. In particular, the East Texas assets, we've been growing production dramatically in our processing capacity. We keep doing expansions to match what the producers are pulling out of the Cotton Valley and the Haynesville shale. But as you mentioned, also at the Arapaho plant in Western Oklahoma, our utilization is down just a little bit but it's all part of the plan. Because we're completing a 60 mile pipeline from the Cana-Woodford over to Arapaho and within the next couple of weeks, we're going to be bringing in the Cana-Woodford gas into the Arapaho complex to raise the utilization in Western Oklahoma back into the higher ranges where we like to be. It wasn't that long ago when the Arapaho complex was very highly utilized in the 90% range. We're really looking forward to the successful drilling that Newfield is completing in the Cana-Woodford and I believe they've been very happy with the results there. And that gas will be filling up Western Oklahoma as well. So we've got a lot of positive activity going on in the Southwest business unit. -------------------------------------------------------------------------------- Helen Ryoo, Barclays Capital - Analyst [64] -------------------------------------------------------------------------------- And then on the Carthage expansion, do you have an expectation when you would fill up that additional 80 coming online? -------------------------------------------------------------------------------- John Mollenkopf, MarkWest Energy Partners LP - EVP & COO [65] -------------------------------------------------------------------------------- Yes, I think towards the end of the year 2015, maybe into the first quarter of 2016 we may be utilizing that facility again up into the high, into the 90 type percent range. Today, we actually are exceeding 100% on the capacity of the plants that we have and the foresight that the operations and engineering teams had in East Texas was to install a plant that was capable of doing 200 million a day. But they only initially installed the residue compression for 120. So this expansion is very economic and just involves adding the additional compression to the back end of the plant to bring it up to that 200 million a day capacity. It's a really efficient expansion. -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [66] -------------------------------------------------------------------------------- Helen, just to add to that too, I think the thing to also remember is that our operation in Western Oklahoma, in Southeast Oklahoma, in East Texas, if you look at the way that those facilities are designed around our producers' acreage, we're able to swing gas around and be able to optimize our facilities. So that's also a key benefit of how we've designed our facilities. The short answer to your question is yes, the increased drilling programs in East Texas and in Western Oklahoma will increase utilization. And in fact, as John said, we're currently planning for additional plant expansions in Western Oklahoma and in East Texas to be able to accommodate what we see as the future growth. -------------------------------------------------------------------------------- Helen Ryoo, Barclays Capital - Analyst [67] -------------------------------------------------------------------------------- And traditionally that part of your business had commodity exposed contracts. But on your Newfield deal and the Carthage expansion, are you converting or getting new business in the form of fee based contracts? Or is it still your traditional keep-whole and POP type of contracts being extended? -------------------------------------------------------------------------------- John Mollenkopf, MarkWest Energy Partners LP - EVP & COO [68] -------------------------------------------------------------------------------- Yes, we actually have very little keep-whole and POP contracts left kind of from some of the legacy contracts we had in the early 2000s. All of the new contracts that we've signed are fee based and most of them have minimum requirements as well. So we've definitely moved towards fee based in the Southwest. East Texas is a great example. We used to have a pretty good portion of our income that was percentage of liquids and today, there's almost no contracts left that are commodity based. It's all fee based. -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [69] -------------------------------------------------------------------------------- That's a good point, John, because the overall, as you know, Helen, we're 90% fee based. And just to clarify, if you think about the commodity exposed portion of our business in the southwest business unit, that's driven primarily, as I said earlier, by keep-whole agreements but it's also whether it's keep-whole or POL, it's still a very, very small piece of the overall business. -------------------------------------------------------------------------------- Helen Ryoo, Barclays Capital - Analyst [70] -------------------------------------------------------------------------------- Okay, that's helpful. Just going to Marcellus and Utica, did you guys adjust down your volume growth guidance in Marcellus and Utica by 5%? And also, on Majorsville 7, has the timing been pushed out by a quarter and is all of this being driven by the producers just optimizing their drilling activity? And is there anything else going on if there was a timing push out on these things? -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [71] -------------------------------------------------------------------------------- Absolutely, Helen. The timing of Majorsville 7 as well as the 5% change was a result of all of the optimization and the changes in the producers' drilling programs. So every quarter, as I mentioned earlier, this is a work in progress and next quarter -- well, actually at our June investor conference, we'll give you a lot more detail around all of those factors; the volume forecast, the capital program and the resultant timing and resultant utilization of our facilities. And next quarter, we'll provide another update. This is going to be a very dynamic situation as we move throughout 2015. Commodity prices are changing, we've got downstream projects coming on, we're doing a lot of capital optimization, we've got new agreements like Rice that we're continuing to execute on. So you expect every quarter or every investor presentation we'll include the combined effects of all those factors. -------------------------------------------------------------------------------- Helen Ryoo, Barclays Capital - Analyst [72] -------------------------------------------------------------------------------- And then last question, in Marcellus, your current plan has about 800 million cubic feet of capacity coming online in 2016. But fractionation, there's some capacity coming online end of 2015 and there's fractionation coming online in Utica in 2016. So my question is, will you need more fractionation, C3 frac, in Marcellus to service that 800 new capacity coming online or should some of that go to the Hopedale expansion and also absorbed by the expansion coming online in 2015? -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [73] -------------------------------------------------------------------------------- Well the short answer, Helen, is no. Every quarter we're going to provide updates on the required fractionation capacity to support the continued ramp up in rich gas development. What you see in the current schedule and the in service dates on our map, reflects our best estimate for volumes and the just in time timing for fractionation capacity, whether that's at Hopedale or up at our Keystone facility. And again, keep in mind that our Hopedale facility is shared between the Marcellus and the Utica. There's a large diameter Y grade pipeline that interconnects those two facilities which is a great benefit for us, not only for optimizing and balancing the volumes but also market access. So what you see in the current plan is the optimized in service dates for both the processing and fractionation facilities. -------------------------------------------------------------------------------- Helen Ryoo, Barclays Capital - Analyst [74] -------------------------------------------------------------------------------- Okay so you may announce additional fractionation for 2016, that's to be determined? -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [75] -------------------------------------------------------------------------------- That is correct. We will announce it as it's required, keeping in mind that that fractionation, that type of fractionation project is a 12 to 18 month type project. So as we speak, we are evaluating the next phase of fractionation expansion to support the continued development in the Marcellus and the Utica. -------------------------------------------------------------------------------- Helen Ryoo, Barclays Capital - Analyst [76] -------------------------------------------------------------------------------- Got it. Thank you very much. -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [77] -------------------------------------------------------------------------------- Thanks, Helen. -------------------------------------------------------------------------------- Operator [78] -------------------------------------------------------------------------------- Thank you. I'll now turn the call over to Mr. Frank Semple for closing remarks. -------------------------------------------------------------------------------- Frank Semple, MarkWest Energy Partners LP - Chairman, President & CEO [79] -------------------------------------------------------------------------------- Thanks to everyone for joining us on the conference call today. We, as always, appreciate your interest and continued support of MarkWest and always, please call us if you have any additional questions. That concludes our conference call. -------------------------------------------------------------------------------- Operator [80] -------------------------------------------------------------------------------- Thank you, you may now disconnect.
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