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Executives

Brian Begley – VP, IR

Ed Cohen – Chairman

Eugene Dubay – President and CEO

Glenn Powell – COO

Matt Jones – CFO

Analysts

Lee Cooperman – Omega Advisors

Bernice Katich [ph] – Wachovia

Eric Kalamaras – Wachovia Capital Markets

Yves Siegel – Aroya Capital

Gregg Brody – JP Morgan

Billy Aberman [ph] – Petro-Hunt

John Tysseland – Citigroup

Atlas Pipeline Partners, L.P. (APL) Q4 2008 Earnings Call Transcript March 2, 2009 11:00 AM ET

Operator

Good day ladies and gentlemen, and welcome to the fourth quarter 2008 Atlas Pipeline Partners earnings conference call. My name is Tamale, and I will be your Operator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of the today's conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference Mr. Brian Begley, Director of Investor Relations. Please proceed

Brian Begley

Thank you. Good morning everyone. Thank you for joining today's call. Before we go on and describe our results for our fourth quarter and full year 2008 results, I would like to remind everyone that when used in this conference call the words believes, anticipates, expects, and similar expressions are intended to identify forward-looking statements. These statements 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 also on Form 10-K, particularly in Item 1.

I would also like to remind you and 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 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.

Now I would like to turn the call over to our Chairman, Ed Cohen.

Ed Cohen

Hello, everyone. Our main speaker this morning will be Eugene Dubay, who has succeeded me as Chief Executive Officer of APL and AHD, its general partner. Landing Eugene is a real coup for APL. As for myself, now continuing non-Executive Chairman of APL, I anticipate basking in the glory of Eugene’s accomplishments. I don't mean to embarrass Eugene, but he really has it all. Good education, a graduate of the United States Naval Academy. He is also a Certified Public Accountant and holds an MBA in accounting from Texas A&M University. He knows our industry, over 20 years experience in midstream assets and utilities operations. He has been an executive with ONEOK and with Southern Union, and most recently, since 2003, he was Chief Operating Officer of Continental Energy Systems before joining us as CEO earlier this year. Even knows Tulsa, having lived there once before. And he's no stranger to our company having previously served as an outside director of APL.

Eugene, we are all ears.

Eugene Dubay

Thank you, Ed. Ladies and gentlemen, I am pleased to be here today with Atlas Pipeline Partners. Even in this extremely challenging economic environment, I am confident that with our solid asset base, our experienced field employee group and our strong management team, we will succeed in creating value on behalf of our equity and debt holders.

I would like to ask you to keep the larger picture in mind as you listen to our presentation. In a devastating economic environment, Atlas Pipeline Partners is creating an anticipated gross margin of over $300 million in the coming year even after the contemplated sale of assets that we will describe. 27% of this gross margin is fee income and 56% is in margin expected to be derived from percentage of the proceeds contracts, leaving only 17% of the margin related to keep-whole contracts.

Our margin and cash flow are sustainable and very likely to increase in the coming year. Our assets are concentrated in operating areas where we are still seeing drilling and well connects, and we expect in 2009 with volumes equal to or exceeding the volumes across our system in 2008. There are not many companies operating today that have the expectation that their product volumes will increase this year.

Atlas is a fundamentally strong company in excellent operating areas. We have a great deal of experience and talent in our field operations and a management team that is committed to improving the equity value for our unit holders and reducing leverage for our creditors. We will operate in 2009 with a discipline that you would expect in this environment. We will reduce O&M expenses, we will ensure capital spending goes only to essential projects and improve our contract term wherever possible, while continuing to provide, what we believe, is best in class service to our customers.

In our last investor call, the company committed itself to evaluating all strategic options. Today, we are in discussions that will likely lead to three transactions. The first transaction involves selling a 50% interest in our 9-Mile processing plant. The counterparty has received Board approval on the transaction and we have made significant progress in negotiating the agreements necessary to consummate the transaction.

Our second transaction entails the sale of potentially all of our Ozark assets. We have engaged UBS to manage a formal process with regard to these assets. The process has gotten to the point that we have been exchanging mark-up agreements with different interested parties. The timing of this transaction may be dictated by the Hart-Scott-Rodino requirements and final negotiations on the purchase and sale agreements.

The third transaction we are currently working on involves a sale of an interest in our Appalachia system. Discussions have progressed on this transaction and we are confident that we will close this transaction in the very near future. Of course there can be no assurance that any of these transactions occur, but I can assure you we are working to get them done. All of these transactions are expected to be accretive to our debt covenants and cumulatively will have significant deleveraging impact. Such deleveraging will better position APL for future opportunities, which we believe will benefit both our equity and debt holders.

We’ve had inquiries or offers with regard to other of our assets, but at this time we are focused on the transactions that I have described. We only intent to sell those assets necessary to achieve the deleveraging that we need.

I'm going to ask Glenn Powell to talk to you about the current status of activities in each of our operating areas.

Glenn is our Chief Operating Officer. I appreciate very much your time and attention and thank you for your support and investment in the company. Glenn?

Glenn Powell

Thank you, Eugene. The fourth quarter was a challenging period for gatherers and processors. The deterioration in commodity prices led to ethane rejection at our Elk City, Sweetwater and Waynoka plants for a portion of the quarter. We also faced operational challenges which resulted in a reduction of process volumes at our Midkiff/Benedum facilities due to hurricane Ike. However, the adversities we faced were tempered by a successful open season for firm transportation on our expanded Ozark Gas Transmission interstate pipeline to which we proudly announced we've essentially sold all of our firm capacity for the next two years.

Additionally, we have recently begun to flow gas on our segment of our Madill development pipeline projects with the volumes and gas quality meeting our expectations for this product. I will share more details as I discuss the physical results of our respected systems. Again Appalachia operations set new highs in gas throughput during the fourth quarter 2008. We averaged a record 97.1 million per day, an increase of 31% over the similar period of 2007. Field estimates of gas throughput have recently been in excess of 100 million per day. However, with all this growth and the additional increases anticipated from further development of the Marcellus Shale, there comes the need for substantial additional investment. That's why it will be extremely helpful to effectuate the deleveraging transaction described earlier by Eugene. Not only would we receive substantial cash to play down loan obligations, but we also would have a stronger partner to help us meet the capital requirements that will be demanded by this exciting Appalachian opportunity.

Across all our systems, for the fourth quarter of 2008, we moved approximately 1.38 billion cubic feet of natural gas per day, produced approximately 48,000 barrels per day of NGLs, and recovered approximately 2,300 barrels per day of condensate. We connected over 142 new wells to our system during the quarter.

At our Chaney Dell system, we gathered approximately 285 million per day in the fourth quarter, 13% higher than the fourth quarter of 2007. Despite being an ethane rejection in December, NGL production was 14,100 barrels per day, consistent with the production in the third quarter. Condensate production increased 47% over the fourth quarter of 2007 and we connected 69 wells to this system in the fourth quarter.

At our Elk City/Sweetwater system, we moved volumes of approximately 242 million per day, a decrease from the third quarter. Despite this decrease, the impact on processing plant utilization was limited as a result of processing gas received on our Slider pipeline from our Chaney Dell gathering system. As you may remember, the Slider pipeline allows us to transfer gas to our Sweetwater processing plant that would have previously been bypassed at the Chaney Dell system processing plants.

As we noted earlier, the Elk City and Sweetwater plants operated in ethane rejection in the month of December resulting in an average of 9,336 barrels per day of NGLs and 429 barrels per day of condensate, a substantial increase from the 166 barrels per day gathered in the fourth quarter of 2007. From a supply perspective, 18 wells were connected over the quarter. The continuation into October, the hurricane Ike related NGL pipeline curtailment had an adverse impact on the fourth quarter results for our Midkiff/Benedum system. Due to a high Btu gas received on the system, we were required to shut gas in at the well head in order to cope with the NGL pipeline curtailment. As a result, gathered volumes were down approximately 10% to 140 million per day. Likewise, NGL production was also reduced in the fourth quarter with production of about 18,000 barrels per day. The fourth quarter volume impact associated with hurricane Ike was about 14 million per day reduction in plant inlet volumes and over 2,400 barrels per day reduction in our NGL production, approximately 12%.

The NGL pipeline curtailment was resolved in mid-October and the Midkiff/Benedum has since been operating as normal. In addition, the Midkiff/ Benedum system completed a total of 50 new well connects in the fourth quarter. On the Ozark Gas Transmission system, the average daily volume was 531 million a day, an increase from the third quarter volumes 446 million per day. Through the use of backhaul transportation, we were successful in transporting gas in excess of our certificated full haul capacity of 500 million cubic feet per day. As mentioned previously, we had a successful open season which fully subscribed at maximum allowed tariff rate, the additional capacity provided by the Standing Rock compressor station.

Additionally in the fourth quarter, we renewed firm transportation commitments with several key shippers, and as a result we have sold basically all of our certificated firm capacity for 2009 and 2010. Within our Velma system, we processed an average of 60 million cubic feet per day and NGL production was 6,485 barrels per day for the fourth quarter of 2008. From a commercial standpoint, there were three wells connected to this system during the quarter. At our Velma system, we have made significant progress on our Madill development pipeline project with initial volumes received in February. We expect to complete this pipeline in early April. The Madill development pipeline is a 70 mile, 16 inch that will begin in our Velma facility and terminate near Madill, Oklahoma. This pipeline will access Ardmore Basin of the Woodford Shale formation primarily in Carter and Marshall Counties. As the pipeline extends eastward, we began to gather a portion of the volume. The volumes and gas quality received are meeting our projections. We expect this pipeline will allow us to reach our goal of utilizing all of our available capacity at our Velma plant, which the capacity is 100 million a day by the end of the year.

The construction in our previously announced 9-Mile plant is progressing, and we expect to be in service in April of 2009. As you all are aware, this plant is situated on the Slider pipeline between Elk City and Chaney Dell systems. As Eugene mentioned, our goal is to sell a portion of this 120 million a day plant in order to align our capacity requirements with our volume expectations.

We continue to aggressively pursue efficiency opportunities on our Midkiff/Benedum system, which includes the construction of our 150 million a day consolidated cryo plant. As a part of the assessment of capital expenditures discussed by Eugene, we are evaluating options with respect to capital requirements at this plant. The construction of this plant will increase NGL recoveries, lower ongoing maintenance capital requirements and also provide us with an additional 40 million a day of incremental processing capacity for that system.

In summary, we continue to face challenges in the quarter that we are addressing. Due to the current conditions in the capital markets, commodity environment and drilling plans of our producers, we are continuing to assess our current and future capital spending plans. We will remain flexible in these plans and aggressively pursue efficiencies in our contract structure.

That concludes my remarks and I will turn this over to Matt Jones.

Matt Jones

Thanks, Glenn. I would like to begin with an explanation of the large non-cash accounting loss associated with goodwill that we reported in our press release. Significant deterioration of commodity prices and steep declines in global economic activity, among other factors, led us to write off all goodwill on our books. While this may seem draconian, we believe that in this economic mayhem, conservative decisions on accounting matters are preferable. I want to emphasize this non-cash charge does not reflect any operating experience we have had other than the impact of lower commodity prices. Our actual physical assets remain unchanged.

Also, we reported in our press release mark-to-market adjustments related to our derivatives positions and we think that should be noted. On a net basis, we recorded a non-cash mark-to-market gain of $152 million in the quarter related to the reduction of potential future charges caused by falling commodity prices. The non-cash mark-to-market gains are included in the line item titled ‘other income’ in the revenues section of our income statement. We ended the quarter with a total potential future net hedge liability of $63 million, substantially reduced from prior periods. From the partner slips, net hedge liability reached as much as $700 million. While the reduction in net hedge liability generally tracks a substantial downward movement in commodity prices over the last 6-8 months, lower commodity prices negatively impacted our operating results in the fourth quarter.

Contributing to operating cash flows in the fourth quarter, we generated roughly $69 million in gross margin from our processing activities, which indicates roughly $1.17 gross margin per processed unit throughout our systems. This compares to $1.40 per processed unit in the third quarter. The processing margin includes contributions for our Chaney Dell complex, Elk City/Sweetwater assets, Midkiff assets and our Velma facility. Our processing margins are influenced by the absolute and relative levels of natural gas liquids prices, natural gas prices and the price of crude oil.

We also generated substantial fee-based revenues in our business from transportation and compression fees. In the fourth quarter, we generated roughly $23 million or 25% of our total gross margin from those fee-based sources, including our NOARK pipeline and Appalachia gathering systems. Plant operating expenses this quarter totaled approximately $0.24 per processed unit compared to $0.27 in the third quarter. This improvement resulted from previously-anticipated declines in chemical costs and fuel costs associated with light trucks and automobiles used in our operations.

Our cash general and administrative expenses in this quarter came in at $6.4 million after adjusting for a non-cash stock compensation credit of $19.7 million. The credit relates primarily to the reduction in value of potential stock compensation awards driven by a decline in our common unit price and other factors.

Our partnership declared a distribution of $0.38 per common unit for the fourth quarter with a 1.5 coverage based on cash flow generated from ongoing operating revenues. To arrive at the 1.5 coverage ratio, we conservatively subtract from distributable cash flow a $19 million cash gain realized from the monetization of certain 2009 hedge positions, a positive $10 million adjustment related to the early termination of certain fourth quarter 2008 hedge positions and a $20 million gain generated from the early extinguishment or retirement of debt. The retirement of debt relates to senior notes that we repurchased during the fourth quarter at roughly 67% of par, generating the gain and reducing interest expense by approximately $5 million on an annualized basis.

Moving to our capital position at the end of the quarter, we had approximately $683 million of partners capital after adjusting for the write-down of goodwill, $707 million of senior secured term loan outstanding that mature in July of 2014, $302 million drawn on our $380 million revolving credit facility which matures in July of 2013, and about $485 million of senior unsecured notes outstanding, of which $262 million mature in 2015 and $223 million that mature in 2018.

Our capital budget in 2009 will be influenced by a variety of factors including commodity price levels, drilling activity, general economic conditions and liquidity considerations. We have laid out a CapEx budget in November that include the fourth quarter of 2008 and continue to the fourth quarter of 2009, covering a total of five quarters. Our budget for this period totaled $200 million. While this remains our total estimated budget for this period, we may adjust this amount based on the factors that I have just mentioned as well as other factors that influence our willingness or desire to fund under our capital program. Of course, if economic conditions move in a positive direction and capital markets are cooperative, we will cautiously move to expand our assets where we can achieve adequate rates of returns in the areas where we operate and potentially beyond those areas.

Lastly, our senior secured credit facilities are governed by a credit agreement. That requires that we maintain certain financial ratios that are measured at the end of each quarter. The ratios include a measurement of total debt to trailing 12 months EBITDA for the maximum allowance of 5 1/4 times, the measurement of trailing 12 months EBITDA to trailing 12 months interest expense that requires a minimum of 2.75 coverage. We satisfied these requirements at the end of the fourth quarter. In fact, we ended the fourth quarter with covenant measures that proved compared to the end of the third quarter.

We are far enough along in this quarter to know that in the absent – the presently unanticipated global disasters we will be compliant with our covenants for the quarter ended March 31, 2009. I apologize for making reference to potential global disasters. But for those of us who have lived through the last six months, global disasters can’t be ruled out.

That concludes my remarks and I will turn the call to Eugene Dubay, our CEO.

Eugene Dubay

And I think at this point, we are ready to take questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Lee Cooperman with Omega Advisors. Please proceed.

Lee Cooperman – Omega Advisors

Sure, thank you. I apologize; I missed part of the call because I hit the wrong button and got disconnected. So some of these questions you may have addressed so I do apologize if I ask something that is redundant. You mentioned the three potential asset sales. I was wondering – let me just state all the questions and then you can go however you want. Just whether you have a timetable a likely timetable for conclusion of those and do you feel comfortable if executed that this would remove any risk of covenant breach over the remainder of the year, not just in the March quarter.

Then secondly, you did a financing, APL sold some securities to AHD which we had some issues with. I was wondering of that transaction has been rescinded or will be rescinded.

And then thirdly, you set the dividend in the most recent quarter at $0.38 which is well below what you reported the way of earnings, at a level you thought you could sustain or this is just a one quarter at a time development that we would have to wait and see. How do you arrive at the $0.38 and is that something that you think is sustainable to grow from or who knows; those three questions.

Eugene Dubay

Let me try to address them in the order that you asked them. And thank you. With regard to the asset sale, we would anticipate that they come together in the next few weeks. Again, we mentioned with regard to Ozark that we may have Hart-Scott-Rodino filing, so say it comes together in the next few weeks and we would have an announcement that the transactions versus the same agreements have been entered into and then with regard to Ozark, we had some time following that.

With regard to covenants, we are confident that with the asset sales we are talking about that we will be in good shape with our covenants. Again, when I say we are in good shape, and Matt so eloquently alluded to earlier, this is really a dynamic market. So we are proceeding with the expectation that we are in good shape with our covenants with these transactions. I actually missed your third question with regard to the –

Lee Cooperman – Omega Advisors

The $0.38 dividend was that set at a level that you thought you could sustain or –

Eugene Dubay

When we set that level, we set it with the idea that it was sustainable, and of course, the Board will review that dividend at the next quarter meeting. But we did set up with the idea that it was sustainable.

Lee Cooperman – Omega Advisors

Thank you. Good luck.

Operator

Your next question comes from the line of Bernice Katich [ph] with Wachovia. Please proceed.

Bernice Katich – Wachovia

Hi. Good morning. Couple of questions; what commodity prices are you assuming for the $300 million gross margin forecast and also, are you assuming any ethane rejection occurs during the year?

Matt Jones

For the $300 million gross margin forecast, we are using commodity prices as they are today. And we are not assuming ethane rejection in that model.

Bernice Katich – Wachovia

Okay. So is that strip pricing?

Matt Jones

That is strip pricing to me.

Bernice Katich – Wachovia

And I guess could you talk about APM’s decision to drill fewer shallow appellation wells and focus primarily on Marseilles Shale, whether that would impact your gathering business at all?

Ed Cohen

This is Ed responding. It should be helpful to our gathering business; the fact that fewer wells are being drilled is more than overcome by the fact that each well will have enormously higher results.

Bernice Katich – Wachovia

Okay. And then finally, I think you mentioned you are in compliance with your debt covenants at the end of Q4. So to calculate that ratio, I would just take the $98 million adjusted EBITDA figure or are there some other adjustments that need to be made?

Eugene Dubay

That is the right analysis. And remember, that it is a trailing 12 months calculation. So you would incorporate the three quarters prior to the fourth quarter of 2008 to calculate the full analysis.

Bernice Katich – Wachovia

Okay. Thank you very much.

Operator

Your next question comes from the line of Eric Kalamaras with Wachovia Capital Markets. Please proceed.

Eric Kalamaras – Wachovia Capital Markets

Hi guys, good morning. A question I guess related to the transactions, could you kind of clarify what the risks might be that those don't get done and secondly, can you just make a general comment on producing behavior in the Mid-Con, shut in activity and that sort of thing?

Eugene Dubay

With regard to the – I guess the risks that they won't get done. I think that they are fairly low. We're going quite a ways in this discussion and we don't get any sense that our partners or counterparties are waffling. With regard to what is happening in the midcontinent, we have seen some gas come off the system recently. I think we're down 16,000 a day that has been shut-in in the out city area. And we expect there'll be some more gas shut-in but I think we are generally in good shape across the system. Again, I started this presentation out by saying that I think we will have more gas across the system in 2009 than we had in 2008 and I feel confident that that is going to happen.

Eric Kalamaras – Wachovia Capital Markets

And I guess a follow up on the transaction. Matt, you went through the process. Can you indicate kind of where you thought the target levered point was where you wanted to be and notional proceeds that you are hoping to achieve. Just make any comment to that please?

Matt Jones

Yes. I think Eric that our objective was to first of all generally de-lever the total amount of the proceeds as something that has been subject to the continuation of the efforts to conclude the asset sales. I think we're satisfied with where we are today with that. I think it would be – I would prefer not to give a total number of de-levering impact from the sales, but I hope it is sufficient to say that it will be impactful to us – and meaningfully impactful to interest expense going forward, covenant compliance, et cetera.

Eric Kalamaras – Wachovia Capital Markets

Great. Thanks, Matt. Appreciate it.

Operator

Your next question comes from the line of Yves Siegel with Aroya Capital. Please proceed.

Yves Siegel – Aroya Capital

Thank you. Just several questions; one, sort of back in the envelope; yes, I will push Eric’s question a little bit. Could you envision proceeds around $600 million on the three transactions?

Eugene Dubay

Yes. I appreciate the effort. But I think we are hesitant to give a total number associated with the asset sales. I prefer to leave it at that.

Yves Siegel – Aroya Capital

Okay. Then let me also try to get a flavor for Mr. Cooperman’s question. When you set the distribution for the recent quarter, were all these asset sales contemplated in terms of thinking about the sustainability of that distribution?

Eugene Dubay

It was based on our expectation of operating income.

Yves Siegel – Aroya Capital

Okay. So let me just ask that differently then. If you're successful in these three transactions, will that be an event that will allow you to sustain the distribution at the current level?

Eugene Dubay

You are asking me to anticipate what the Board decision will be and I don't want to do that.

Yves Siegel – Aroya Capital

Okay. And then, if you could describe – my last question is, could you describe your philosophy on the hedges going forward as it relates to unwinding some of them most recently and within that context, could you also give the philosophy of how you see the risk profile of the business moving forward; and by that, I mean by sending a fairly large fee-based pipeline business, it would seem that perhaps you are increasing commodity exposure.

Eugene Dubay

Let me speak to the hedges first. Matt and I have discussed going forward that we're going to adopt a hedging strategy which is an options-based strategy and prospectively, our hedging risk will only be with regard to the value the cost of those options. So we're going to try to layer in options as appropriate to give ourselves floors on prices with regard to liquids and perhaps lock in the opportunity with regard to gas prices to lock in a margin where appropriate. So prospectively, as the opportunity presents itself, we will layer in more options with that strategy. With regard to the sale of Appalachia, which is a fee business; yes, that will add some risk, but in the current operations, as we move forward, we are trying to move our contract mix more to a fee-based business. And I said on – really talked about peephole or percentage of proceeds contracts, in most of those contracts, we have fees associated with the contracts. So even though we may have talked about a peephole contract, we usually have fees associated with those contracts. And we are trying to move our contract mix to take more business in the fee business as we move forward and I think we have got some success with that recently.

Yves Siegel – Aroya Capital

Thank you.

Operator

Your next question comes from the line of Gregg Brody with JP Morgan. Please proceed.

Gregg Brody – JP Morgan

Good morning guys. With respect to your asset sales, I don't know if it's possible but for Nine Mile processing plant toward the Ozark assets, could you provide its number for the last 12 months?

Eugene Dubay

Nine Mile wasn't operating in the last 12 months.

Matt Jones

It is a brand-new processing plant, so there is no EBITDA.

Gregg Brody – JP Morgan

And what about with Ozark?

Eugene Dubay

We have disclosed what Ozark’s gross margin was in the last 12 months. Do you have that, Matt?

Matt Jones

Yes, Gregg, we generate currently $10 million plus of gross margin or cash flow from NOARK. That is on a quarterly basis. So on an annualized basis, we expect gross margin generation of about $40 million from that asset, $35 million to $40 million from that asset.

Gregg Brody – JP Morgan

Okay. And you mentioned potentially more investment opportunities with Appalachia with a partner. Can you expand upon that a little bit?

Eugene Dubay

I would prefer not to until we have concluded that agreement. Once we have entered into the agreement and we share that, I think it will be evident what our opportunities are.

Gregg Brody – JP Morgan

Okay. Thank you, guys.

Operator

The next question comes from the line of Billy Aberman [ph] with Petro-Hunt.

Billy Aberman – Petro-Hunt

Hi guys. Thank you for taking the question. To follow back up on the distribution question, I guess, which follows back up on Mr. Cooperman’s question, I guess is that I know that you mentioned in response to that question is that when setting the distribution, the desire was set it at an amount that was sustainable. I guess to follow up on the second question on that is that amount sustainable when you contemplate the acquisitions or I'm sorry, the divestitures that you have discussed on the call?

Eugene Dubay

I think the short answer to that is, yes. But that encompasses a lot of other factors. And again, I don't want to get ahead of the Board –

Billy Aberman – Petro-Hunt

I understand, I understand. I'm just asking in terms of when you went through that analysis, whether you took the divestitures into account during that analysis?

Eugene Dubay

Yes.

Billy Aberman – Petro-Hunt

Okay. The second question, Mr. Cooperman's fourth question actually was never answered, and that's with regard to the transaction at the end of the year. I just wanted to hear some additional commentary on that with regard to the convertible preferred transaction at the end of the year.

Matt Jones

APL issued or sold a convertible preferred to AHD at the end of the year. The total transaction was about $10 million. AHD has an option to increase the amount of the investment by the end of March of this year. So AHD invested $10 million and in return was issued a convertible preferred security with an option rate. The investment in APL obviously enhanced to a degree APL’s liquidity position and allowed APL to include in its EBITDA in the fourth quarter certain amounts that were generated from the termination of hedges during the fourth quarter, the early termination of hedges in the fourth quarter. So there were benefits, I think across the board here to APL and to AHD in the transaction, but that's what occurred.

Billy Aberman – Petro-Hunt

Okay. And I guess the question actually was with regard to whether or not you had any success in moving that fixed-rate preferred from a convertible or whether or not the transaction stands as is?

Matt Jones

Billy, we noted your comments on that to us privately previously and we referred the question to the Conflict Committees of the two companies.

Billy Aberman – Petro-Hunt

Okay. And on the NOARK Pipeline, currently since it's running above the 500 million, I guess by my math, I thought the gross margin would be closer to between $45 million and $50 million versus the $35 million to $40 million. Can you help me a little bit in terms of where my math is off?

Matt Jones

Yes. The number that you are referring to a gross margin number, I suppose I did as well. But there are expenses associated with operating that system, and we allocate certain amount of G&A to that system. So I was referring to a net number, net of G&A allocation to –

Billy Aberman – Petro-Hunt

(inaudible) gross?

Matt Jones

That's right. I apologize, that's correct.

Billy Aberman – Petro-Hunt

So, there are $40 million in operating margin?

Matt Jones

That's right.

Eugene Dubay

And some of the increase in volumes on an interruptible basis where we don't get the same margin with regard to those molecules. So it's not linear as the volume has increased.

Billy Aberman – Petro-Hunt

Okay, and on operating margin, it seems past transactions have been done with regard to pipeline assets, while historically it was 10 times to 12 times on operating margin basis. Have you all seen – it’s my understanding kind of current multiples would be eight or 11 times EBITDA, is that fair for current marketplace?

Matt Jones

I don't want to get a – again we will endeavor to get these transactions finalized and report them shortly and then the numbers will stand for themselves.

Billy Aberman – Petro-Hunt

Okay, thank you all for your time.

Matt Jones

Thank you.

Operator

Your next question comes from the line of John Tysseland with Citigroup. Please proceed.

John Tysseland – Citigroup

Hi guys. Quick point of clarification regarding the potential asset sales. If you realize a gain on these sales where you sell them for more than what they are on your book value, will that gain go toward the income calculated for your covenant calculations? In other words, if you realize a gain, will that go toward an LTM EBITDA increase that would help you, I guess more or less pad any type of covenant test?

Matt Jones

John, I don't think that a gain on an asset sale is included in our covenant calculation. So that would not be one of the many benefits, but that would not be among the many benefits that we will receive from the asset sales.

John Tysseland – Citigroup

Okay. Thank you.

Matt Jones

You're welcome.

Operator

And we have no further questions. I would now like to turn the call back over to Eugene Dubay for closing remarks. Please proceed.

Eugene Dubay

Ladies and gentlemen, we very much appreciate your interest in the company. And again in closing, I want to ask you all to keep the big picture in mind. Fundamentally, this is a very sound company with great assets. We as a management team look forward to continuing to work with you and we all endeavor to improve the value of our equity holders and our debt holders. With that, thank you very much for your time and your participation.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.

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Source: Atlas Pipeline Partners, L.P. Q4 2008 Earnings Call Transcript
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