Atlas Pipeline Holdings, L.P. Q1 2009 Earnings Call Transcript

Atlas Pipeline Holdings, L.P. (AHD)

Q1 2009 Earnings Call

May 11, 2009 9:00 am ET

Executives

Brian Begley – VP, IR

Eugene Dubay – President and CEO

Glenn Powell – COO

Matt Jones – CFO

Analysts

Sharon Lui - Wachovia Capital Markets, LLC

Douglas Clifford - Omega Advisors

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Atlas Pipeline Partners earnings conference call. My name is Eric. I'll be your audio coordinator for today. (Operator Instructions)

I would now like to turn the presentation over to Brian Begley, head of Investor Relations. Please proceed.

Brian Begley

Good morning, everyone, and thank you for joining today's first quarter 2009 earnings call.

Before our management team reviews the results of operations from the quarter I'd like to remind everyone that when used in this conference call the words believe, anticipates, expects and similar expressions are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties which can 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 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 obligation 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.

And with that I'll turn the call over to our Chief Executive Officer, Gene Dubay.

Eugene Dubay

Thank you, Brian. Ladies and gentlemen, I appreciate your attendance today and your participation with Atlas Pipeline Partners.

We committed to you in our discussion last March that we would reduce our leverage and improve the operations of the business. This past quarter has been challenging, but we have made significant progress toward the achievement of the objectives that we outlined in our March call.

Since we spoke last we have closed on our sale of the NOARK Pipeline gathering assets and we have entered into a definitive agreement to contribute our Appalachian assets to a joint venture with the Williams Companies. In exchange for cash and a note of approximately $125 million, Williams will be given an interest of 51% in the joint venture. This transaction has significant upside for Atlas Pipeline. Williams has a great reputation in the industry and with them as partners we will have an opportunity to gather third-party gas that we would not have otherwise had access to. And we will have a partner to share the significant capital contributions that will arise as the Marcellus Shale is developed.

We continue to work on an agreement to sell our Sweetwater 2 plant. The transaction we discussed in March was the sale of a 50% interest in our Nine Mile plant. This transaction involved a sale of capacity in our Sweetwater facility to accommodate the buyer's desire to have gas processed in their own facility. The potential sale of the plan represents the sale of 60 million a day of excess capacity. Of course, we are now processing in excess of 200 million a day in this business operation and after the sale we will have additional capacity to add volumes to this business operation. The result of these transactions will be to reduce the leverage at Atlas Pipeline by over $300 million.

Concurrent with our efforts to reduce leverage we have been working to make the business operation more efficient. We identified 40 nonessential positions in Tulsa and eliminated those positions in March. We have consolidated operating units in Okalahoma and have significantly cut back our capital spending.

Despite the downturn in the economy and the fall off in energy consumption we have been successful in maintaining the volumes of gas across our system and in this past quarter our total volumes gathered exceeded the volumes we gathered in the last quarter of 2008. To assist in stabilizing earnings during periods of commodity price volatility we are committed to executing an options-based hedging strategy that will limit our risk to the cost of the options purchased. This strategy will allow Atlas Pipeline to benefit from commodity upside while ensuring sustainability of cash flows.

Our operational challenge is to continue to add volumes and revenue to the system while providing best in class service to our customers within the cost structure we have today. I am confident that we are going to be able to do that. Our cash flows and volumes have been strong and we believe that going forward we have a great asset base that will enable us to build back value for our unit holders.

With that operational background, we are fully aware that the macroeconomic and financing environment is as difficult as it has ever been and we have been able to deal with that. Accordingly, in order to meet our goals, we have taken a number of significant steps, including asset divestitures, reductions in staff and other expenses, and reductions in our distributions. In connection with our dispositions we have also been pursuing arrangements with our lenders that are intended to strengthen the company's position. As soon as arrangements are reached we will report fully on the resulting amendments. In the meantime, I will assure you we are in full compliance with all our covenants and anticipate remaining in compliance.

The past quarter has been both challenging and satisfying and we anticipate further challenges and further opportunities in the near term. In this past quarter the Board declined a distribution of $0.15. Further distributions will be determined by the Board at the appropriate time. They may decide that retention of cash is a better option in the next several quarters.

Thank you, again. I'm going to ask my colleague, Glenn Powell, the Chief Operating Officer, to speak specifically about the operations of our business units. Glenn?

Glenn Powell

Thank you, Gene.

We experienced a marked improvement in our physical operations in the commodity environment in the first quarter. Operationally the NGO curtailments at our Midkiff/Benedum facility were resolved in early January and during the same period we ceased being in ethane rejection at Waynoka, Elk City and Sweetwater facilities. The decision to recover ethane at these processing plants was due to the improvement in commodity price spreads during the first quarter. NGO prices have recently stabilized and crude oil prices have moved up substantially from the low prices experienced in early 2009.

Mid-Continent natural gas prices remained depressed, but recently have begun to show some strength. On a combined basis in the first quarter of 2009 our five Mid-Continent systems moved approximately 1.3 Bcf of natural gas per day, produced approximately 52,000 barrels of NGLs, and recovered approximately 2,700 barrels of condensate. We connected 93 new wells into our system during the quarter.

At our Chaney Dell system we gathered approximately 300 million a day in the first quarter, 17% higher than the first quarter of 2008. NGO production was approximately 14,000 barrels per day, a 10% increase over the prior year first quarter. Condensate presentation increased 13% from the fourth quarter of 2008. A total of 34 new wells were connected to the system during the first quarter.

At our Elk City/Sweetwater system we moved approximately 250 million cubic feet per day, a slight increase from the volume gathered during the fourth quarter of 2008. Economic conditions warranted the operations of our plants and ethane rejection for half of the month of January. In spite of ethane rejection we produced an average of approximately 12,000 barrels of NGLs during the first quarter, a 26% increase from the fourth quarter of 2008. The condensate production on this system continued to improve, with a 23% increase over the prior quarter. From a supply perspective, 19 wells were connected to the system.

We were successful in bringing our Midkiff/Benedum system back to normal operations in the first quarter of 2009. As you may remember, the system faced operational difficulties as a result of the NGL high plain curtailments in the aftermath of Hurricane Ike. Gathered volumes increased to 156 million per day, a 12% increase over the prior quarter and a 9% increase from the first quarter of 2008. NGL production also recovered in the first quarter with the production of approximately 20,000 barrels per day of liquids and condensate production increased to 859 barrels per day. The Midkiff/Benedum system also completed a total of 33 new well connects in the first quarter.

Within our Velma system we gathered approximately 66 million per day, a 9% increase over the fourth quarter of 2008. We recovered about 7,000 barrels of NGLs and 350 barrels of condensate per day, an 8% and 46% improvement over the prior quarter. From a commercial standpoint, there were 7 wells connected to the system during the quarter.

The volume increases on the Velma systems this quarter are a direct result of the success of our Madill development pipeline project. As you may remember, the Madill development pipeline is a 70-mile pipeline with 16-inch pipeline that begins at our Velma facility and terminates near Madill, Oklahoma. This pipeline provides us access to the Ardmore Basin and the Woodford Shale formation. The increases in volumes in the first quarter have continued into the second quarter and we are currently processing approximately 80 million per day. We expect the volume growth to continue and that we will reach of goal of utilizing all remaining capacity at our Velma plant by the end of the year.

The construction of our previously announced Nine Mile plant is essentially complete. This plant is situated on the Slider pipeline between the Elk City and Chaney Dell systems. We believe that once the sale of the Sweetwater 2 plant is consummated we will begin to process gas at this facility.

At our Midkiff/Benedum system, the construction of our 150 million a day consolidator cryo plant continues to move forward. 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 processing capacity on that system. We anticipate this project to be completed in the fourth quarter of 2009.

For our Appalachia system we continue to realize the growth in our system from which we have benefited over the past several years. Average daily throughput reached approximately 98 million per day in this system this quarter, and we are currently experiencing volumes of over 115 million a day due to the production growth of our affiliate Atlas Energy from the development of the Marcellus shale.

As Gene mentioned earlier, we are pleased to enter into the joint venture agreement with Williams to partner on future growth of the Appalachia system. This partnership with Williams will benefit all parties involved in this transaction and Atlas Pipeline will now be able to continue to provide high quality service with the combined resources and capital of both companies. We look forward to working with Williams and to moving ahead on growing our leading position in the region.

Our capital spending this quarter totaled $72 million, heavily weighted towards the completion of the Madill development project, the Nine Mile plant in Western Oklahoma, and well connection compression upgrades. With the completion of the development project and the Nine Mile plant we had anticipated that the first quarter would represent our most substantial capital spending period of the year.

In summary, although we experienced improvements in operations and commodity prices in the first quarter, we have remained focused on addressing the challenges created by the economic recession. We are optimistic that by remaining flexible in our capital spending plans and aggressively pursuing operational efficiencies we will achieve great success.

That concludes my remarks and I'll turn the call over to Matt Jones.

Matt Jones

Great. Thank you, Glenn. Good morning, everyone.

The increase in processed volumes this quarter compared to the first quarter of last year helped mitigate the steep decline in commodity prices experienced between quarters. While NGL prices have recovered from trough levels seen in the fourth quarter of last year, first quarter 2009 prices averaged roughly 60% below prices realized in the year ago period. More recently, NGL prices have continued to improve and spot crude prices and the forward crude curve have moved higher. We're hopeful that this trend will continue and it seems to have gained momentum in recent days as markets appear to be discounting in the increased possibility of global excess capacity recovery.

Looking back to the first quarter of 2009, the partnership generated approximately $65 million of gross margin from processing activities or roughly $1.05 per processed unit, significantly below year ago levels. The processing margins include contributions from the Chaney Dell complex, Elk City/Sweetwater assets, Midkiff/Benedum assets, and development facility. 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 generated roughly $22 million in gross margin from transportation and compression revenues, largely from the NOARK pipeline and Appalachia gathering systems. Recently we closed on the sale of the NOARK system and signed a definitive agreement to sell 51% of the Appalachian gathering system, as Gene had mentioned.

Plant operating expenses this quarter totaled approximately $0.22 per processed unit, continuing a trend of lower operating costs experienced in recent quarters. We're seeing some of the initial benefits from the actions that we've taken to reduce expenses, including the combination of the operations of the Elk city/Sweetwater and Chaney Dell assets, which has eliminated redundancies.

Our general and administrative expenses came in at $11 million this quarter. After giving effect to $2.8 million of nonrecurring severance charges recorded in the first quarter of this year and $2.8 million of non-cash compensation gain recorded in the first quarter of last year, G&A declined compared to the first quarter of last year. The severance costs this period are associated with the elimination of nonessential positions that Gene had outlined designed to reduce the cost of operating and administering our business.

Our partnership declared a distribution of $0.15 per common unit for the first quarter, resulting in a 3.5 times coverage position based on cash flow generated from operating revenues. To arrive at 3.5 coverage ratio we conservatively subject from distributable cash flow a $19.5 million cash gain realized from the monetization of 2009 hedge positions and a positive $5 million adjustment related to the early termination of certain first quarter 2009 hedge positions. The increased distribution coverage position allows the partnership to retain cash to enhance its liquidity and debt covenant compliance position.

That, I think, is a good segue into the discussion of our capital resources, liquidity and debt covenant compliance at the end of the quarter. We had approximately $607 million of partners' capital at the end of the quarter, $707 million of senior secured notes outstanding that mature in July of 2014, $324 million drawn on our $380 million revolving credit facility that matures in July of 2013, and about $500 million of senior unsecured notes maturing in 2015 and 2018.

Net proceeds from the recent closing of the NOARK asset sale were used to reduce amounts outstanding under the term loan and revolving credit facilities. 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 financial ratios include a measurement of total debt to trailing 12-months adjusted EBITDA on a maximum allowance of 5.25 times and a measurement of trailing 12-months EBITDA to trailing 12-months interest expense that requires a minimum of 2.75 times coverage. We satisfied these requirements at the end of the first quarter and expect to be compliant with these covenants for the quarter ended June 30, 2009.

We remain committed to our objective of reducing our leverage and improving efficiencies throughout our business. We'll continue to take actions that we believe will lead to an environment where our stakeholders benefit fully from the value of our asset base as general economic circumstances improve.

With that I'll turn the call back to our CEO, Gene Dubay.

Thank you all very much. I think that we're ready for questions at this point, so please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Sharon Lui - Wachovia Capital Markets, LLC.

Sharon Lui - Wachovia Capital Markets, LLC

I'm just wondering if you could provide some more color on your outlook for volumes given where natural gas prices are today?

Glenn Powell

I'll just take it system by system. Looking at our West Texas facility, we did about 156 million a day and, as is the case on all of our systems, we're working creatively with our producers to find ways to bring gas in. We're also working with some of our smaller gatherer-processors, looking at their businesses and rationalizing whether it makes more sense for them to shut down and bring gas into our system. So just looking forward on the West Texas facility as well as our other systems, obviously rigs have been put down, but we've been able to creatively find ways to bring gas to each one of our systems.

Looking at our Velma system with the shale play, it continues to grow. As I mentioned earlier, we're doing about 80 million a day right now and there continues to be quite a bit of activity with a lot of working rigs in and around the system.

Looking at our Western Oklahoma facilities, Chesapeake and Sand Ridge were our largest producers last year. On our Chaney Dell facility, they've obviously laid down their rigs; however, we have been able to bring in additional volumes from other points without spending much of our capital.

Looking at our Elk City system, the largest producer, Sanguine, ConocoPhillips, they've remained pretty steady up to date.

Sharon Lui - Wachovia Capital Markets, LLC

So would it be fair to say that you're just expecting flat volumes from Q1 to a modest decline?

Glenn Powell

I can tell you that we have a lot of projects, that we're working with a lot of our customers to continue to grow the volumes or at least maintain the volumes. Obviously, I'm not going to give you a guarantee, but thankfully we do have some options on things that we can do to help supplement the lack of new drilling.

Sharon Lui - Wachovia Capital Markets, LLC

Turning to expenditures, do you have a number for '09 growth CapEx and maintenance CapEx?

Matt Jones

Sharon, I think that, as Glenn had said in his remarks, the first quarter of this year we believe represents the high mark in terms of CapEx for the year.

I think that our budget this year will be dependent upon a number of factors, some of which remain to play out. I think we had anticipated substantial capital being invested in well connections moving forward. Well connections may require substantial capital; they may not. I think that with the Madill to Velma project being largely complete - not totally complete, but largely completed - at the end of the first quarter and the Nine Mile plant being largely completed at the end of the first quarter that CapEx for the remainder of the year will be relatively muted compared to the first quarter.

I think as far as the total budget is concerned I think that we would have at the low end CapEx for the year in total, at the low end something around $120 to $130 million, at the high end perhaps as much as $160 million or so plus. And the difference between those numbers really is a function of the numbers of well connects that we add to our system, compression that's added to our system, the build out of the consolidator plant, and other potential expenditures that will occur or will not occur depending upon circumstances as they develop in the marketplace and with our business.

Sharon Lui - Wachovia Capital Markets, LLC

And specifically for maintenance because it looks like the last two quarter numbers were a bit light?

Eugene Dubay

We have worked hard to curtail spending, but we've also knocked down some of the maintenance expenditure in anticipation that the consolidator plant will be built. We really looked hard at this project, but we have firm commitments with regard to power, we have firm commitments with regard to the incremental liquids out of the plant. We're going to get such an upgrade from the plant that we're going to be able to process more gas, we're going to get better efficiency and we'll have more liquids at the tailgate of the plant, so this project is going to get done.

But, as Matt had alluded to, we're trying to knock down all of our spending wherever possible and that's had an impact on the maintenance CapEx. I don't think, though, we're jeopardizing the system or our ability to get volumes through the system.

Sharon Lui - Wachovia Capital Markets, LLC

I guess maybe, Matt, if you could just talk about the hedge monetization or decision to monetize additional hedges this quarter?

Matt Jones

We had made the decision in late February, I think it was, to monetize a decent portion, probably a substantial portion, of our hedges in the remaining quarters of 2009, and we took at the action at the time for a number of reasons.

First, the gain that we experienced, the cash gain that we experienced, enhanced liquidity in the first quarter, this leading into the asset sales that we were undertaking, which further enhanced liquidity. Also the monetization allowed us to take advantage in the first quarter of the EBITDA that was generated from the gains from the monetizations, so they enhanced first quarter.

I'd say this also, we unwound or monetized crude puts that we had in place. Crude at the time was trading around high 40s or 50 or so. Crude today trades at levels that fortunately are higher than that, so we were able to monetize those positions and experience greater gains than we would have experienced, at least so far, had we waited until the contracts settled.

Operator

(Operator Instructions) Your next question comes from Douglas Clifford - Omega Advisors.

Douglas Clifford - Omega Advisors

This is a variant on Sharon's question on volumes, Gene. Are your Mid-Con volumes as of today roughly comparable to the average for the first quarter that you put out or has anything significantly changed?

Eugene Dubay

I'll turn this over to Glenn, but I think they've actually increased some since the end of the first quarter. As Glenn talked about, the new volumes coming on at the end of the Madill development line, those volumes have come on faster than we expected, so we're in really good shape with regard to that capital project.

Glenn Powell

That's absolutely correct. We've actually seen an increase in volumes at both our West Texas facility and then also at our Velma facility, and then we've been able to maintain our volumes through the first quarter and into the second quarter in our Western Oklahoma facilities.

Douglas Clifford - Omega Advisors

The other question is, Gene, whether you can put any flavor for the bank discussions now, whether there's anything you can say about that.

Eugene Dubay

I think it would be premature. I think we've got a great relationship with Wachovia; they're working very well with us. But it's best to talk about a deal when you have a deal.

Operator

And we're showing no more audio questions in queue at this time.

Eugene Dubay

All right. Well, thank you very much. We really appreciate your participation. We will keep you informed as we move forward. I think that really it's a bad market, but we're in a very good position in this market. I'm very pleased with regard to the operation of all of our business units. I think all of our people are focused in the right direction, and we look forward to working with you all. We're going to add value to this business. Thank you very much.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!