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Atlas Pipeline Partners, L.P. (NYSE:APL)

Q4 2012 Earnings Call

February 19, 2013 10:00 am ET

Executives

Matthew Skelly – Head-Investor Relations

Eugene N. Dubay – President and Chief Executive Officer

Robert W. Karlovich, III – Chief Financial Officer

Patrick J. McDonie – Senior Vice President and Chief Operating Officer

Analysts

Ethan H. Bellamy – Robert W. Baird & Co.

Sunil K. Sibal – Citigroup Global Markets Inc.

Derek B. Walker – Bank of America Merrill Lynch

Helen Jung Ryoo – Barclays Capital, Inc.

Sharon Lui – Wells Fargo Advisors LLC

Selman Akyol – Stifel, Nicolaus & Co., Inc.

James A. Spicer – Wells Fargo Securities LLC

Operator

Good day, ladies and gentlemen, and welcome to the Quarter Four 2012 Atlas Pipeline Partners Earnings Conference Call. My name is Ian. I'll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, the call is being recorded for replay purposes.

Now, I’ll like to turn the call over to Mr. Matthew Skelly, Head of Investor Relations. Please proceed, Sir.

Matthew Skelly

Thank you, Ian. Good morning and thank you for joining us for today’s fourth quarter and year-end 2012 earnings call. Before our management team provides comments on our fourth quarters’ results, I’d like to remind everyone of the following Safe Harbor provision.

During this conference call, we may make certain forward-looking statements that is statements related to future, and not past events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition and often contain words such as expect, anticipate, intend, believe, and similar words or phrases.

Forward-looking statements by their nature address matters that are, to different degrees, uncertain and are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected in the forward-looking statements. We discuss these risks in our quarterly report on Form 10-Q and our annual report on Form 10-K, particularly in Item one. I would like to caution you not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof.

The company undertakes no obligations to publicly update our forward-looking statements, or to publicly release the results of any revisions to forward-looking statements, which may be made to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

Lastly, management’s discussion this morning includes references to items such as adjusted EBITDA and distributable cash flow, which represent non-GAAP measures. A reconciliation of these non-GAAP measures is provided in the financial tables of our quarterly earnings release that went off last night, as well as our Form 10-Q.

With that, I will turn the call over to our Chief Executive Officer, Gene Dubay, for his remarks. Gene?

Eugene N. Dubay

Thank you, Matt. Ladies and gentlemen, thank you for taking your time today with us at Atlas Pipeline Partners. We appreciate very much your interest in the company. This has been an exiting time for the company. In this past quarter, we acquired the Cardinal assets in South East Oklahoma. We increased the distribution through our unit holders. We hedged our residue production well into 2014 and 2015, and we extended and re-cashed our contract with SandRidge in Western Oklahoma.

The volumes of gas we are gathering continue to come up across our systems. In fact as of this week, we only have approximately 65 million cubic feet per day of capacity available across our systems. This represents only 6% of the overall 1.1 billion cubic feet per day in overall processing capacity.

The addition of the Cardinal assets which were purchased in December, and now referred to as our Arkoma assets; add 220 million cubic feet per day of processing capacity to our operations. A 100 million cubic feet per day of that processing capacity is jointly owned with MarkWest Energy.

Atlas Pipeline now has approximately 1 BCF per day of processing capacity and that total will soon increase to a total of 1.2 BCF per day of capacity with the addition of the Driver plant in West Texas. Over a four year period, we have increased the volume of gas we are processing across these systems by over 100%. I emphasis or I cannot emphasis enough how exciting a time this is for us at Atlas Pipeline.

Towards the end of this quarter and the beginning of the second quarter, we expect that the Driver plant in West Texas will come on line. DCP will complete their natural gas liquids pipeline construction projects, relieving our liquids production constraints in Western Oklahoma and West Texas. And our liquids production should increase dramatically as a consequence of these events.

Pat McDonie our Chief Operating Officer will elaborate on our field operations shortly. Trey Karlovich, our Chief Financial Officer will speak to the financial results for the quarter. However, beyond what we believe were good results for the quarter. We believe we have strengthened the company with the addition of the Arkoma assets and the fee income associated with that operation.

We have reduced our commodity sensitivity with the renegotiation of the SandRidge contract to a percentage of proceeds agreement, and we have elongated our hedge book.

The fourth quarter and the current quarter are building blocks which we believe will result in a very robust year and position us positively for future growth and future success. We very much appreciate your interest in Atlas Pipeline Partners. And with that, I’ll ask Pat McDonie to speak to our field operations. Pat? Thank you.

Patrick J. McDonie

Thanks Gene, and good morning everyone. We continue to see high level of producer activity around our systems in the fourth quarter, especially in our WestOK and WestTX areas. As a result of this continued activity, our year-over-year gathered volumes have increased 36% on our existing asset base and 68% when the volumes associated with our newly acquired Arkoma assets are included.

As a result of this continued growth in gathered volumes, we are now processing on an average more than 1 BCF per day of natural gas. Our liquids productions volumes also increased 42% as compared to the third quarter and 42% year-over-year. The quarterly increase in liquids production was primarily due to constraints in fractionation capacity at Mt. Belvieu easing during the fourth quarter.

However we will continue to be restricted in our ability to fully process our inland gas volumes in our WestOK and WestTX areas, until additional liquids takeaway capacity becomes available with the much anticipated startup of the DCP, Sand Hills and Southern Hills NGL pipelines early in the second quarter of this year.

This high level of producer activity continues to enable us to invest additional capital to expand the infrastructure around our existing processing facilities and consequently provide attractive returns to our unit holders. We continue to remain very optimistic about future organic growth projects in all of our core assets areas, including the construction of a new processing facility in our recently acquired Arkoma area, which I will discuss further in a minute.

In our WestOK region we have 39 rigs running behind the system and during the fourth quarter we connected 139 wells, a 12% increase from the prior quarter. This increase in producer activity resulted in a 8% increase in gathered volumes over the previous quarter. Year-over-year, our process volumes grew 38%. We have 458 million cubic feet a day of nameplate processing capacity in WestOK, and we currently have 450 million cubic feet of processable gas available in the area. We are processing 405 million cubic feet a day offloading 20 million cubic feet a day and bypassing 25 million cubic feet a day.

We are and will continue to operate in partial ethane rejection and bypass and offload gas until the start up of DCP Southern Hills NGL line, which will provide additional NGL takeaway capacity. As I previously stated, we anticipate start up to be early second quarter 2013.

As Gene mentioned, we have extended our relationship with SandRidge, the largest producer in the Mississippi Lime with a new five year contract commencing January 1, 2013. All SandRidge production connected to our system prior to January 1st will remain under the existing contract until mid 2014, at which time that production will be subject to the new agreement. All wells connected after January 1 of this year will immediately be subject to the terms of the new agreement, the new agreement as the percentage to proceeds contract complemented by an additional fixed fee gathering component.

On expiration of the existing agreement, the partnerships key pull exposure will be materially reduced. In addition to the extension in term from the previous contract, SandRidge has agreed to dedicate three additional areas in Southern Kansas including Harper, Sumner, and Cowley counties.

Including the originally dedicated areas within SandRidges Oklahoma, Mississippi in position, the new agreement now includes the majority of SandRidges developed acreage with the burgeoning Mississippi Lime formation.

We expect the level of drilling activity in this area to remain high for the foreseeable future, and with that activity, the opportunity to continue to grow our extremely well located asset position. We are evaluating those additional opportunities, but as always will prudently apply our capital when the landscape better defines itself and the risk return equation meets our internal requirements.

At Velma, there are currently 12 rigs working behind our system and during the fourth quarter, gathered volumes remained flat. We connected five wells during the quarter, but as a reminder, we receive a significant portion of our new production on this system from behind existing central delivery points.

We have 160 million a day of nameplate processing capacity between our two plants in the Velma area and we are currently processing around 140 million cubic feet a day and net volumes at our Velma facilities have been up and down over the past four months as XTO, the largest producer out here continues to develop their acreage and fulfill both obligations to us and ETC.

We expect the volumes to remain between 140 million cubic feet a day and 160 million cubic feet a day between now and July 1 at which time our contractual arrangement with XTO for the 60 million cubic feet a day of capacity at the V-60 plant becomes a firm capacity commitment. In another words, we will collect our contracted for fixed fee amount on 100% of the 60 million cubic feet a day of capacity regardless of the volume actually provided. Producer activity in this area is expected to increase in 2013, and we remain excited about additional growth opportunities in our Velma area.

In our WestTX region, there are 66 rigs currently dedicated to the system and year-over-year we realized a 30% increase in gathered volume. This growth was mainly due to increased volumes through existing delivery points as a result of producer infield drilling and recompletions. We currently have 295 million cubic feet a day of processable gas available in the West Texas area versus nameplate processing capacity of 255 million cubic feet a day.

Liquid production rose 22.5% in the fourth quarter due to the removal of a declared force majeure maintenance event at a third-party fractionator, which cause them to operate at a reduced capacity prior to the fourth quarter. This relate to lot of us to begin recovery at some ethane on the system. We do expect to operate the WestTX facility at partial ethane rejection due to transportation and fractionation limitations until the start of the DCP Sand Hills NGL pipeline, which is expected to commence operations early in the second quarter of this year.

In WestTX, we have a good problem solved. We have more processable gas than we currently have processing capacity. Our solution to this good problem is the completion of the construction and start up of the Driver plant. We expect start up of this 200 million cubic feet a day cryogenic processing facility at the beginning of April. If you all recall, we had originally planned on constructing this facility in two 100 million a day phases, but because of the continuing growth in volumes and our producers’ aggressive 2013 drilling plans, we decided to completely build up the plant to enable an initial start up capacity of the full 200 million cubic a feet. By making it to the full 200 million cubic a feet a day available, we will achieve some beneficial operational efficiency and because the volumes are growing so rapidly, it became a more efficient use of our capital.

Because of the continued level of drilling activity and future plans of our producers, we also remain excited about the additional organic growth opportunities in the WestTX area. We continue in discussions with Pioneer, our partner in our Permian asset position and the largest and most active producer in the Permian basis about when to begin construction on an additional 200 million cubic feet a day processing facility. When those details become clear, we will provide you with that information.

At the end of the quarter, APL acquired assets from Cardinal Midstream LLC, which we now refer to as our Arkoma area. During the fourth quarter, the linked gas gathering system in this area gathered and treated 15.4 million cubic feet a day and the rich gas assets processed 211 million cubic feet a day out of the total nameplate processing capacity of 220 million cubic feet a day. In addition, we offloaded, 35 million cubic feet a day to a third-party and we’ll continue to do so until completion in early July of alignment project to relieve a gathering constraint. At that time, we will fill our remaining available capacity and continue offloading excess volumes as needed until completion of the construction of the new Stonewall cryogenic processing facility. The assets also produced 16.1 million barrels of NGL liquids during the quarter per day.

We are working diligently on the engineering and permitting phases of the new 200 million cubic feet a day Stonewall play. We expect construction to begin in late April and start up to be during the first quarter of 2014. This new facility will be a Centrahoma owned asset, which is the joint venture between Atlas, 60% and MarkWest, 40%. We will build the facility in two phases; the first stage providing a 120 million cubic feet a day of new capacity in the first quarter of next year and the second phase adding 80 million cubic feet a day will be completed when needed.

Because of the operational setup of our assets in this area, the capital required to build out the four 200 million cubic feet a day of processing capacity is expected to be less than $50 million net to the partnership.

I would also like to comment that the acquired assets in the Arkoma area are performing as expected and that the integration of the assets and the employees is going extremely well. We are very pleased to add these high quality assets, which provide 80% of the revenues from fixed fees to our rapidly growing portfolio of assets and look forward to additional opportunity in this area.

With respect to our remaining facilities, transported volumes on West Texas pipeline, which we jointly own with Chevron averaged approximately 255,000 barrels per day. We gathered 8.9 million cubic feet a day on our Tennessee system and APL Barnett gathered 22.7 million cubic feet a day. All three of these facilities continue to generate stable earnings under fixed fee arrangements and have minimal capital requirements.

That concludes my remarks and I’ll now turn the call over to our CFO, Trey Karlovich.

Robert W. Karlovich, III

Thanks Pat. Another strong quarter physically as our operating areas continued to show volume growth beyond our expectations. And while we are only reporting one month of operations from the new Arkoma assets, we remained pleased that the results are in line with our expectations.

I am very pleased to report our financial results for the quarter and for the year. Overall, our financial results for the fourth quarter and for the entire year were solid and very much in line with our guidance. Our quarterly and annual results were towards the upper end of the guidance we issued last year in spite of the lower than forecasted commodity prices. Our results were driven by the volume growth on each of our assets during the year which Pat has covered and our hedge position has provided additional support to the lower than forecasted NGL prices.

We recently announced an increase to our quarterly distribution, which is now $0.58 per unit, our ninth increase out of the past ten quarters and 5.5% increase over our distribution in the same quarter last year.

Our full year distribution total of $2.27 per unit was 16% increase over our total distributions for 2011. We were able to increase our distributions this quarter with fully diluted coverage of 1 times, however coverage would have been 1.1 times pro forma for owning the Arkoma assets for the entire quarter. We continue to believe that maintaining adequate distribution coverage and a strong balance sheet is important for the partnership and our plans for 2013 embrace these goals.

During the fourth quarter, we raised over 325 million in equity and additional 175 million within add-on to our 2020 notes. We recently in January, completed a senior notes offering for 650 million, which mature in August 2023. The total unsecured debt in December and January was issued at a weighted average rate of 5.9% and weighted average term of almost 10 years. The proceeds from these offerings have been used to finance the Cardinal acquisition tender our 8.75% notes, which were due in 2018 and permanently finance a portion of our organic capital program with long-term debt.

In conjunction with these offerings, our unsecured credit rating was increased by S&P to B+, while Moody's had upgraded our unsecured rating to B2 in September. Our corporate family rating remains B+ B1 at both agencies respectively. Pro forma for our recent offering and the tender of the 8.75% notes we had 551 million of liquidity as of the end of the year.

We believe maintaining adequate liquidity and a prudent balance sheet structure as well as continued improvement to our credit profile enables us to take advantage of strategic internal and external opportunities as they present themselves.

Covering the financial highlights for the quarter and full year, our adjusted EBITDA for the quarter was approximately $64 million, an increase of about 15% compared to the third quarter and 30% better than the fourth quarter last year. Distributable cash flow was more than $40 million, 7% increase from last quarter and about 12% higher than the same period last year.

Full year adjusted EBITDA totaled $220 million, which was 22% higher than last year and the resulting distributable cash flow was of $146 million, was a 12% increase to prior year. As we have discussed key factors impacting the results during the year including the fourth quarter include continued increases in gathered and processed volumes in the Arkoma acquisition, offset by restricted liquids takeaway in Western Oklahoma and West Texas, including an approximately 20% reduction in our West Texas facility from May through September the impact covered and continued lower NGL prices.

The liquids takeaway constrains and low price of ethane during the quarter and second-half of the year resulted in West Texas facilities operating ethane rejection, fortunately as both Gene and Pat mentioned our liquids takeaway solution is coming soon in 2013, with DCP Southern Hills and Sand Hills lines go into operations. We had weighted average NGL prices during the quarter and for the year of $0.90 per gallon, down 23% and 25% respectively from prior periods. The price decline was mitigated by our hedge positions, which provided a $2.3 million net benefit to distributable cash flow during the fourth quarter.

Despite continued low NGL prices, our unhedged gross margin was about $80 million for the quarter, compared to $69 million for the third quarter of this year. A complete summary of our volumes and prices was included in the earnings release that went out yesterday. Quarterly plant operating expenses of $16.8 million, and general and administrative cost of $10.6 million, excluding non-cash compensation we're in line with our expectations and our guidance and our annual expenses were within 2% of our plant, very commendable considering the volume growth and activities in or around our operating area this year.

Interest expense totaled $14.1 million this quarter, reflection our September revolver term out as well as financing for our acquisition. We expect our interest cost to increase in 2013 compared to 2012 as we have completed most of our projects and replaced the revolver borrowings for these projects with unsecured debt. Our maintenance capital expenditures totaled approximately $5.8 million this quarter, resulting in annual maintenance capital expenditures around $19 million, right in line with our prior guidance.

Moving to our balance sheet, we had debt to total capital of about 43%, and debt to adjusted EBITDA of four times pro forma for the Arkoma assets, which is calculated for our debt covenants. As we have continually communicated, we expected our overall leverage to peak around four times through our construction program and assuming status quo operations. With our recent acquisition and our capital expenditure plans for 2013, we expect leverage to stay around four times for this year. Our liquidity at the end of the quarter was approximately $310 million, and as I previously mentioned approximately $551 million pro forma for our January bond offering and tender offer.

We spent approximately $125 million in the fourth quarter on growth capital, primarily related to our new processing plants and gathering expansions on our WestOK and WestTX facilities.

We incurred approximately $355 million of growth capital and $634 million in acquisitions this past year, which is funded a very compelling list of projects including acquisitions in the Mississippi Lime, Arkoma and Barnett. Completion of two new processing plants along with a significant amount of the construction of the third plant and significant infrastructure expansions on each of our systems. With a driver facility expected to be complete early this year, and the anticipated capacity increase in Arkoma in early 2014, our nameplate processing capacity will be almost 1.5 Bcf per day almost 2.5 times our processing capacity at the beginning of 2012.

Now looking forward to 2013 based on various pricing assumptions, we are projecting our adjusted EBITDA for the year to range between approximately $320 million and $360 million, resulting in DCF between $200 million and $240 million. I'd like to point out that our price sensitivity in NGL continued to decrease as our contract structure becomes more free and percent of proceeds based. Our model utilizes the current weighted-average commodity price curves with results in prices similar to our fourth quarter 2012 prices. Taking into account our various operating, coverage and balance sheet targets we are projecting distributions between $2.50 and $2.60 per unit for 2013 potentially went up to 15% increase to 2012.

Additionally we are projecting our growth capital expenditures to be approximately $350 million this year, as we complete our Driver and Stonewall plant expansions and continue to add gathering infrastructure in each of our operating areas that will allow for the next wave of process and expansions. We remain focused on staying ahead of our producer customers, and supplying the needed processing capacity at the time it is necessary. This includes required gathering and processing infrastructure as well as the necessary residue natural gas and NGL takeaway options. We will look to provide further guidance for 2013, and beyond as we announce any new growth opportunities.

Price protection continues to be a focus even as our contract structure moves to be more fee in percent of proceeds based. Our projected margins and cash flow, excluding ethane for 2013 are approximately 78% protected; we are 56% protected in 2014 as well as being approximately 24% protected in 2015, while we have added more fee based revenues. We continue to use similar risk management targets for the commodity sensitive portion of our business, which were up to 80% protection for 12 months out, up to 50% for 24 months out, and up to 25% for 36 months out, all excluding ethane. Of course all of these forecasted amounts depend on various factors, many of which are not within our control, including pricing of commodities, producer volumes, and drilling plans, financial markets, third-party maintenance and outages, and other non-convertible events. These estimates have been made with our most reasonable assumptions we currently have available, we discuss additional information about this guidance in the press release we issued last night.

In closing, we continue to be pleased with our operations and our financial results for the current quarter; we are excited about our recent acquisition and the growth opportunities that lie ahead. We believe maintaining our strong balance sheet, ample liquidity and our price risk management objectives allow us the ability to take advantage of opportunities that are present in our marketplace. We again increase our distribution this quarter to what we believe is a least to very sustainable level for the next quarter with adequate coverage, and will afford to more meaningful increases in our distributable cash flow during 2013, as our new facilities began operating to their full capabilities.

I'll now turn the call back over to Ian our operator to open it up for questions. Ian?

Question-and-Answer Session

Operator

(Operator Instructions) Okay, so our first question has come through from Ethan Bellamy, at Baird. Please go ahead Ethan.

Ethan H. Bellamy – Robert W. Baird & Co.

Yes good morning gentlemen, can you tell me how much of your contract mix, you kind of expect to ultimately shift towards fees rather than commodity sensitive contracts; obviously it was NGL hedging options being so poor?

Robert W. Karlovich, III

Hi Ethan, this is Jerry Karlovich. So with the acquisition of the Cardinal assets we project our fee based portion of our gross margin to be about 35% to 36% for 2013, we expect that percentage to stay relatively the same through 2013, and then to 2014, but we do expect to change is our key poll exposure, our key poll exposure is approximately 25% today, we expect that by the middle of 2014, to be reduced between 5% and 7%, with the change going to percent of proceeds.

Ethan H. Bellamy – Robert W. Baird & Co.

Got it, okay that's helpful, with respect to the guidance, what kind of – and I know you probably left this out intentionally, but can you give us a ballpark on expected DCF coverage levels?

Eugene N. Dubay

Yes, what we’ve said in the past, and what we continue to check going forward is that we want to maintain coverage in a normal operating basis of about 1.15 times, and we're committed to do that in 2013 as well, we are not going to – we look out three to four years when we are making our distribution recommendations, we're looking at the coverage, and the price curves at that point of time, and we want to put out a distribution that we feel as sustainable with adequate coverage, so if we have a price decline, our distribution coverage may come down slightly; if we have our price spike, it may go up slightly, but we're looking to maintain that 1.15 times coverage

Ethan H. Bellamy – Robert W. Baird & Co.

Thank you, that's helpful. One last question, you guys obviously have some special insight into Permian Basin liquids takeaway capacity, do you think that the existing pipelines, and plays are going to be adequate to get liquids out of the basin or is there more to come.

Eugene N. Dubay

I think with the addition of both the Lonestar system and the Sand Hill system, it will be adequate for several years, lets say two to three years at least. Obviously, if we see all of the different horizons in the Permian Basin exploited at the same time, and growth to be substantially higher than what it is, which we do not expect to occur, than we could have a need for additional capacity, but right now we think that there is plenty of capacity available for just to say the three to four to five year range.

Ethan H. Bellamy – Robert W. Baird & Co.

Okay, thank you very much.

Operator

Thank you very much for your question. We have another question for you. This is from Sunil Sibal of Citigroup. Please go ahead, you’re in the call.

Sunil K. Sibal – Citigroup Global Markets Inc.

Hi, good morning guys.

Eugene N. Dubay

Good morning.

Robert W. Karlovich, III

Good morning.

Sunil K. Sibal – Citigroup Global Markets Inc.

Yeah. I just wondered a little bit more color on your CapEx guidance for 2013 for $350 million. Could you provide color on how you start broken down between your major projects and other well connection expenditure?

Robert W. Karlovich, III

So this is Trey. And we’ve said this in the past, our typical annual well connection expenditures are between $75 million and $100 million a year, that’s increased a little bit this year over prior years with the amount of activity on each of our systems, and we saw that increase in 2012 as well, which is one of the reasons we increased our CapEx guidance in kind of middle of the year. So you can assume about $100 million for well connections. we still have the completion of the driver facility as well as the capital related to the Stonewall facility. we gave overall guidance for the Stonewall plant of approximately $50 million for the entire project, a big portion of that’s going to be sent this year and early next year for the completion of that plan. On top of that, like I mentioned on the call, we are expanding all of our systems, adding compression and gathering and really setting the systems up for the next wafer processing facilities.

Sunil K. Sibal – Citigroup Global Markets Inc.

Okay, that’s helpful. And then looking at your Western Oklahoma volumes this quarter, could you provide breakdown between how those volumes are split between Mississippian Lime versus Anadarko Basin?

Eugene N. Dubay

I don’t know that I have that data readily available, but I will tell you that the growth is Mississippian Lime, and I’d be glad to get you that that’s not something that we look at normally as a breakdown between the two different producing horizons. but all the growth is associating with Mississippi Lime to trace point on well connect et cetera. when we say we connected to 139 wells in the fourth quarter, obviously more than one well per day, all of which were associated with production from the Mississippi Lime.

Sunil K. Sibal – Citigroup Global Markets Inc.

Okay, that’s very helpful. Thanks guys.

Operator

Thank you very much for your question. We have another question for you. this is from Derek Walker of Bank of America. Please go ahead, Derek.

Derek B. Walker – Bank of America Merrill Lynch

Hey, good morning, guys.

Eugene N. Dubay

Hey, Derek.

Robert W. Karlovich, III

Good morning.

Derek B. Walker – Bank of America Merrill Lynch

With regard to the SandRidge percent-of-proceeds contract, what is the minimum level of throughput volume needed to extend that contract of five years to nine years?

Eugene N. Dubay

Derek, we can’t give you that information.

Derek B. Walker – Bank of America Merrill Lynch

Okay.

Robert W. Karlovich, III

Yeah. It is a volumetric commitment, and I will say it is a pretty substantial volume that we’re really not able to provide you with the specific information.

Derek B. Walker – Bank of America Merrill Lynch

Okay, that’s fair. Kind of similarly with the additional [acreage application] there, I know you touched upon some of the growth opportunities on WestOK, but do you see another potential for another 2000 Mcf per day processing plant there, just didn’t kind of work vastly just currently in the growth opportunity?

Eugene N. Dubay

The answer is yes, we did see the possibility for that, but obviously, we want to make sure that we have the right contractual structure for, it’s not only SandRidge’s incremental volumes for other parties incremental volumes, so that we’re going to get the right type of return on our capital investment, and I will tell you that there is a lot of different activity in that area that kind of defines itself in the next three to four months relative to other large producers and other midstream providers. and I think once some of those things better defined themselves than our ability to invest that capital and moving forward on an incremental project are much clear and when that happens, we obviously will come to the marketplace and make an announcement relative to that.

Derek B. Walker – Bank of America Merrill Lynch

Got it. And then just a quick one back on distribution guidance, just to confirm your 2013 guidance does not include any unannounced organic growth projects or acquisitions, right?

Eugene N. Dubay

That’s correct.

Derek B. Walker – Bank of America Merrill Lynch

Got it. And then just kind of rephrasing, I know you kind of mentioned your coverage target, just kind of going where you see at the asset base right now, growth potential and the hedge profile? Are you comfortable with the kind of a low double-digit distribution growth over next few years?

Eugene N. Dubay

Yes. I mean, as I mentioned on the call, we’ve given our guidance for 2013, we have not given guidance for 2014 or 2015 at this point in time, but we are setting up all of our existing asset base has growth potential as Pat discussed, potential Western Oklahoma just now in his prepared comments. he discussed the potential expansion in West Texas. we’ve talked previously about the potential between the Arkoma and the Velma assets. So we see opportunities out there to continue to grow the existing asset base.

Derek B. Walker – Bank of America Merrill Lynch

Thanks, guys.

Operator

Thank you very much for your question. We have another question for you. this is from Helen Ryoo of Barclays. Please go ahead, Helen.

Helen Jung Ryoo – Barclays Capital, Inc.

Yes, thank you and good morning.

Eugene N. Dubay

Good morning, Helen.

Robert W. Karlovich, III

Good morning, Helen.

Helen Jung Ryoo – Barclays Capital, Inc.

Starting with the question on your ethane rejection, order of magnitude, how much are you rejecting now and do you expect to recover our ethane once the DCP pipeline – the pipelines have put into service?

Eugene N. Dubay

I can’t give you an exact barrel amount that we’re in rejection Helen, but what I will say is that dependent upon price when the DCP assets are in place, both Sand Hills and Southern Hills, we will fully recover ethane as it makes economic sense obviously the comparison in the ethane value versus the value of that same molecule in the natural gas stream. We will have a capability of recovering all the ethane again; price will dictate where we do so or not. It is a significant increase in barrels if we go into full recovery across all our systems. I don’t know that fully answers your question, but…

Helen Jung Ryoo – Barclays Capital, Inc.

Yes, it is.

Eugene N. Dubay

But that’s the way we look at the way we will operate moving forward once those systems are in place.

Helen Jung Ryoo – Barclays Capital, Inc.

All right. and as a follow-up, once the DCP lines start up, order of magnitude, how much of your NGLs will be priced in Mont Belvieu versus Conway, I know today it’s mostly Conway, but at that point, what you say the majority of your – with that Mont Belvieu pricing?

Robert W. Karlovich, III

Okay. Helen, this is Trey. It’s going to be, I mean it’s going to ramp up over time.

Helen Jung Ryoo – Barclays Capital, Inc.

Right.

Robert W. Karlovich, III

Anything over and above what we’re producing today in Western Oklahoma, we’ll go to Mont Belvieu. So every incremental barrel, so as those volumes ramp up, you are going to be adding more and more Mont Belvieu pricing. The Velma System will stay the same until that contract matures, which is in – begins in 2018. And then West Texas is already a Mont Belvieu. So I would say well today, we’re pretty close to 50-50 split, going forward that is going to continually ramp up as WestOK production increases.

Patrick J. McDonie

Well, in all the WestOK volumes go over to Bellevue in 2014. Correct Trey?

Robert W. Karlovich, III

At the end of 2014.

Eugene N. Dubay

Yes.

Helen Jung Ryoo – Barclays Capital, Inc.

And Velma today is Mont Belvieu.

Eugene N. Dubay

The light end is Mont Belvieu, the heavy end is Conway.

Helen Jung Ryoo – Barclays Capital, Inc.

Okay. That’s not going to change for 2018.

Eugene N. Dubay

No, that will not change until 2018.

Helen Jung Ryoo – Barclays Capital, Inc.

Got it, okay. And then I guess just going to your balance sheet, I guess Trey, you mentioned that you’re going to probably have around four times debt-to-EBITDA for the remainder of the year. And as you fund your organic CapEx program, I guess first of all, how much ATM program do you have in place in and is that something you’re likely to rely on, before considering capital market transaction?

Robert W. Karlovich, III

So we put the ATM program in place, it went into place late third quarter, early fourth quarter. we have not utilized much about it all and we had essentially all of it remaining that is something we put in place to fund our capital program going forward. Again, but how we look at the business is to make sure that we keep that leverage in the rounds of four times are better, but as we’ve spoken about, our EBITDA is going to ramp up pretty considerably, it has continually ramped up and then we’ve got the pro forma for the Cardinal acquisition as well. So the Cardinal acquisition, we do at 12 months. We do factor at 12 months of our operations from that acquisition in our leverage calculation as well.

Helen Jung Ryoo – Barclays Capital, Inc.

Got it, okay. So I guess in terms of using the ATM program, is that your fund to tap into that and what’s the size of that program?

Robert W. Karlovich, III

It’s a $150 million that we have available and we have it there if we need it.

Helen Jung Ryoo – Barclays Capital, Inc.

Okay, got it. And then just the last question, big picture, what’s your appetite to do more acquisitions and secondly, like what are you seeing in the market in terms of valuation and deal flows?

Eugene N. Dubay

This is Gene. I mean, Helen, we will continue to look at acquisitions in the valuations are still high, but if the fit is right and we can manage our balance sheet, we’re certainly opened to opportunities.

Helen Jung Ryoo – Barclays Capital, Inc.

Okay, thank you very much.

Eugene N. Dubay

Thank you.

Operator

Thank you for your question. (Operator Instructions) We have another question for you. This one is from Sharon Lui of Wells Fargo. Please go ahead, Sharon.

Sharon Lui – Wells Fargo Advisors LLC

Hi, good morning.

Eugene N. Dubay

Hi, Sharon.

Robert W. Karlovich, III

Hi, Sharon.

Sharon Lui – Wells Fargo Advisors LLC

Looking at the top guidance for 2013, I mean if you could just talk about the key drivers or the variables between the high and low end of your guidance?

Eugene N. Dubay

Sure. So the first variable is the timing for the liquids takeaway pipelines with DCP, their announcement is mid-2013. we expect that to be in the second quarter as Pat mentioned, but that is a variable in our guidance. Price is another variable. we are currently running our model on the curve, but you can flex that price up or down, certain percentage to, based on whatever your assumptions are for commodity prices. And then volumes will be the third variable. again, we have our expectation of what we expect volumes to be on each of our systems based on what we know today. Obviously, last year, our expectations were exceeded. We feel like what we’ve done in this model is to put a curve together that we feel we’re comfortable with.

Sharon Lui – Wells Fargo Advisors LLC

Okay. So I guess looking at, for the midpoint of the guidance, what is your assumption for volume growth on the systems?

Eugene N. Dubay

We’re not going to give our actual volume growth or what our projected volume growth is. What I can say is that, if you look historically over the past 12 to 18 months, it’s been a pretty steady ramp. Each of the systems is a little bit different, but with that activity going on in all of our areas, we expect the volumes to continue to increase.

Sharon Lui – Wells Fargo Advisors LLC

Okay. But not to full capacity for the newer projects coming online this year, I’m assuming?

Eugene N. Dubay

No. I mean, when the Driver facility comes on, we expect to have 30 million to 45 million a day immediately available, but we will use it differently. In other words, it will be a more efficient plant and one of the facilities we currently have in West Texas. so we will use it for operational efficiencies, we will fill it up over the next 18 to 24 months. but initially, we expect somewhere in that 35 million to 50 million a day depending upon. We really don’t know 100%, because we’ve got pressures building on our gathering systems and as you relieve those pressures, you’re going to get flushed production. So those volumes are going to kind of define themselves over a period of time, but that’s what we expect.

Our incremental facilities really have been up and running for a long period of time now. The V-60 plant has been up since June, we expect, it’s 140 million a day right now, actually today, 145 million a day, so 160 million cubit feet a day of capacity out there. We expect it to be completely full between now and July. And our Waynoka II facility that we brought up in September, again, we have roughly 455 million cubic feet a day of processing capacity out there. We have 450 million cubic feet a day of processable gas available. This terminal plant when we bring it along in the first quarter of next year, we expect to load somewhere between 50 million and 65 million cubic feet a day into that plant on day one.

So those are the kind of number across the different regions and areas we see relative to our existing asset base, our new build outs and obviously, in some of these areas, the need for incremental capacity is, as we have said in our prepared comments, is something that is under review. and hopefully, we can get something worked out that we will announce shortly, our next project in those areas.

Sharon Lui – Wells Fargo Advisors LLC

That’s very helpful, and I guess just the last follow-up is, you did mention in the press release that XTO did divert some gas during the quarter may be if you can just provide some color on that?

Eugene N. Dubay

XTO had a contractual arrangement with ET CETERA, whereby they pipe gas about 125 miles down to the northern part of Texas to ETC's new [Gardley] facility, and again ETC bottle lined up into southeast Oklahoma before that, and ETC did a volume metric, I mean XTO did a volume metric commitment with the ETC to complete that agreement, and it’s not dissimilar to our agreement with XTO. It’s a fixed fee volume metric commitment out of facility, but even with that there is plenty of additional opportunity with XTO, and others acreage in that Velma area for incremental growth for our asset position.

Sharon Lui – Wells Fargo Advisors LLC

Okay, thank you.

Operator

Thank you very much. We have another question for you, this one from Selman Akyol, Stifel. Please go ahead.

Selman Akyol – Stifel, Nicolaus & Co., Inc.

Thank you, good morning.

Eugene N. Dubay

Good morning, Selman.

Robert W. Karlovich, III

Good morning, Selman.

Selman Akyol – Stifel, Nicolaus & Co., Inc.

Two quick questions in your comments you’ve talked about offloading volumes at Oklahoma, I was wondering to a third party, can you say how much that was…

Robert W. Karlovich, III

About 35 million a day.

Selman Akyol – Stifel, Nicolaus & Co., Inc.

Okay and then as we think about your CapEx, and I appreciate all the color you’ve given 350 for 2013, $75 million to $100 million on well connect, but as we think beyond that in kind of in your growing footprint, do you see that as a sustainable number going forward, does the opportunities increase or should we expect a low kind of beyond 2013?

Robert W. Karlovich, III

So as of today, I wouldn’t expect a low in any of our operating areas, that well connect number is really over time, we have been in that $75 million to $100 million range every year, except for 2009, so I think that’s a pretty stable well connect number as far as gathering infrastructure, compression processing facilities, again that’s going to be dictated by volume growth for the time being we see that’s being robust in each of our areas.

Patrick J. McDonie

And what I might add to that, if you look at the key producers within our regions, and you look at what they have announced publicly and their expectations for their drilling activity not only in 2013, but in ’14 and ’15 also, obviously we have Chesapeake and SandRidge and Devon growing their activity in the Mississippi Lime, along with (inaudible) and others, all of those guys have remained committed to that particular area and announce growth projects in their drilling programs. Pioneer just raised an incremental $1 billion to accelerate their drilling in the northern half of their Permian acreage, and have aggressive drilling programs announced for the next three years. The same with XTO in our Velma area.

And in the Arkoma area, a little bit different, but it’s a smaller mix producers that have just bought into the acreage position, that it’s a big capital expenditure for that particular group of producers, which means they are going to be focused on in drilling wells on that area, so to trace point, we do not see that there will be a material drop of unless obviously crude oil drops to $60 and gas drops to $2 over the next two, three, four years.

Selman Akyol – Stifel, Nicolaus & Co., Inc.

All right, thank you very much for the color.

Operator

Thank you very much for the question. And we have another question for you, is from James Spicer, Wells Fargo.

James A. Spicer – Wells Fargo Securities LLC

Hey, good morning guys. Just a couple of quick follow-ups, can you provide the LTM EBITDA from the Cardinal Midstream assets?

Robert W. Karlovich, III

James we can’t give you that number, but if you call Matt or I, we can probably help you get back to that number, if you take what we have announced as our pro forma leverage, while it is disclosed it is our adjusted EBITDA, I think you can get back into what we got for the Cardinal adjusted EBITDA number.

James A. Spicer – Wells Fargo Securities LLC

Okay, and also given the growth in the Company in the new projects you have online now, is there any or is there any desire or need on your part to increase the size of our revolving credit facility?

Robert W. Karlovich, III

Based on the liquidity we have today there is not – that’s one of the things, we do have according feature with our revolving credit facility that’s something that we would look at potential acquisitions, and those types of things, but just on a run rate basis, we don’t see the need, I think we got a good balance based on where we are from a ratings perspective as well, we need to keep that balance between secured and unsecured, and the agencies currently look at our revolver capacity not just current borrowings on the revolver.

James A. Spicer – Wells Fargo Securities LLC

Right. Okay that’s it from me, thank you.

Operator

Thank you James, no further questions at this time.

Eugene N. Dubay

This is Eugene Dubay. We as the citizens of this great country are really pleased and proud to be in the energy business as it is transforming the country economically. And we appreciate your interest in Atlas Pipeline, and we will continue to strive to grow and improve this business in the years ahead. Thank you very much.

Operator

Thank you ladies and gentlemen. That concludes today’s conference, you may now disconnect. Have a very good day.

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