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Executives

Brian Begley – VP, IR

Gene Dubay – President and CEO

Glenn Powell – COO

Eric Kalamaras – CFO

Analysts

Lee Cooperman – Omega Advisors

Sharon Lui – Wells Fargo

Helen Ryoo – Barclays Capital

Gregg Brody – JP Morgan

Carl Siegel [ph] – Credit Suisse

Selman Akyol – Stifel Nicolaus

Teresa Fox – Stone Harbor

Marco Russo – Millennium Partners

Atlas Pipeline Holdings, L.P. (AHD) Q4 2009 Earnings Call Transcript February 24, 2010 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Atlas Pipeline Partners earnings conference call. My name is Marisa 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 towards the end of the conference. (Operator instructions)

I will now like to turn the presentation over to Mr. Brian Begley, Vice President of Investor Relations. Please proceed, sir.

Brian Begley

Good morning and thank you for joining us for today's earnings call. Before our management team provides comments on our fourth quarter results, I'd like to remind everyone of the following.

During this conference call we make certain forward-looking statements. That is statements related to future 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 “expects” “anticipates” “believes” and other 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 also on Form 10-K, particularly in Item 1.

I'd 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 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 presentation this morning includes references to such items as 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 fourth quarter earnings release, as well as our Form 10-Q.

With that I’d like to turn the call over to our Chief Executive Officer, Gene Dubay, for his remarks.

Gene Dubay

Thank you, Brian. Ladies and gentlemen, thank you for your time and your attention. This past year has been a challenge with the fourth quarter was resoundingly positive as we continue to capitalize on the strategic position of our assets. We are participating in three of the most active developmental areas in the U.S., the Marcelus Shale, Granite Wash and the Spraberry plant.

Our management team is committed to take maximum advantage of our position in these high return drilling areas. Our assets are strategically located and we have been successful in maintaining our volumes across the system. Drilling activity increased across our operating areas very robustly at year-end and that has continued into the beginning of this year. Over the past year, our management team has endeavored to rebuild the foundation of our company in order to realize the earnings potential that is embedded in our assets. As a result, we have been successful in accomplishing our goals in all critical aspects of our business and operations.

Last year, we were able to significantly reduce our debt position through asset dispositions while at the same time not compromising focus on our core operations. We renegotiated our credit agreement so that we could gain greater financial flexibility and near-term liquidity, allowing us to further pursue and execute on our strategic initiatives.

Additionally, we fully satisfied our capital project commitments last year, including the construction of the Nine Mile plant in western Oklahoma and the consolidator plant in west Texas.

And now, we have to substantially control any additional capital spending, allowing us to reduce our current debt levels and improve our capital structure. More importantly, we now have some of the most efficient systems in the region and available capacity to be very competitive in taking advantage of the growth in the prolific drilling areas in the Mid-Continent.

Glenn Powell, our Chief Operating Officer will address shortly how we are adding volumes to our systems and how expect to benefit from these efforts.

Lastly, we have continued to execute as promised on a strong and consistent hedging program that will not only stabilize our future cash flows, but will retain the earnings generated by our assets and will give them the opportunity to grow in the future.

We expect to be able to strongly benefit from recovering natural gas liquids prices this year, which are already 65% higher than this time last year. Now, almost a year later, we are happy to have not only accomplished what we have said out to do, but we are now seeing the fruits of our labor in our reported results.

Given the cash flow that our enterprises capable of generating in the very near future, which Eric Kalamaras, our Chief Financial Officer, who address later in his remarks, we strongly feel that Atlas Pipeline continues to be undervalued in the marketplace.

This is our primary goal to return value back to our unit holders as soon as possible. We understand that eventually, reinstating our distribution would give more appropriate valuation to our company. And as we said, this would be done at a level that is fully sustainable yet also able to be growing as we expand our operations in the years ahead.

Between our current efforts to reduce our debt and the ability to grow cash flow from our operations which is already in place we look to accomplish this goal in the near-term.

We have begun to see the impact of high return, low risk projects around our core assets, and have the ability to generate significant incremental cash flow through the year.

As mentioned, in the fourth quarter, we completed the construction of our consolidated plant in west Texas. The plant which was completed within budget and on time result in ethane recovery percentages increasing to 91% as compared to 60% at the Midkiff plant (inaudible). This system provides an incremental 40 million cubic feet a day processing capacity. This additional capacity will allow Atlas Pipeline to benefit from the robust 2010 drilling programs (inaudible) producers in the Permian Basin of west Texas.

Our partner, Pioneer has announced that they will be drilling 425 wells in 2010. Other producers in the area have indicated plans to drill approximately 200 wells this year. Looking forward to 2011, we expect even greater growth as Pioneer has indicated it will drill over 700 wells and potentially over 1,000 wells in 2012.

Organically, we continue to focus on executing our business plan to maximize available plant capacity on attractive commercial terms. Our volumes of natural gas liquids and condensate produce this quarter totaled 56,300 barrels per day, which is comparable to the 56,400 barrels per day produced in the third quarter, and up from 47,000 barrels per day which was produced in the fourth quarter of last year. This production was maintained despite increases in field gas usage in the fourth quarter.

As we begin a new year the management team Atlas believes that we are positioned to benefit greatly from the improvement in liquids prices and the increase in drilling activity. We believe that we will see our liquids production increase modestly in the first quarter this year and more substantially in the second quarter and beyond as we begin to see economic benefits from our growth initiatives.

We committed to you last year that we will begin hedging our liquids production. We have hedged our liquids production in the first two quarters of 2010 and now we are working to hedge our production for the latter half of 2010.

We have recent agreement and give us the opportunity to hedge 80% of our liquids production for those quarters on attractive terms. Hedging our liquids will stabilize cash flow and position us to execute on our balance sheet and growth strategies. Also, we have taken out the last of our legacy gas commodity positions and we will benefit from the operation of the business going forward unencumbered by those losses.

We remain committed to operating the business in a way that will maximize the use of our cost structures, stabilize our cash flow by hedging our liquids production, and improve our balance sheet. While 2009 was challenging we have made significant progress on all of these initiatives and position the company to grow in 2010. We will continue to focus on expanding these core assets and operating as efficiently as possible, as we believe we are positioned for success.

At this point, I will turn the presentation over to Glenn Powell, our Chief Operating Officer. Glenn?

Glenn Powell

Thank you, Gene. The fourth quarter was one of continued progress on our operations across all of our business units. The success from running our assets is efficiently and is reliably as possible, allowed us to transport approximately 829 million cubic feet of natural gas per day and produce approximately 54,100 barrels per day of NGLs.

Additionally, we recovered approximately 2,250 barrels per day of condensate. We connected 92 wells into our gathering systems during the quarter. 60 in the Mid-Continent and 32 with our Laurel Mountain asset.

At our Chaney Dell system, we gathered approximately 235 million per day in the fourth quarter, down 13% from the prior quarter. NGL production was approximately 13,000 barrels per day, down 3% from the third quarter of this year. Condensate production was 712 barrels per day, a 5% decrease from the previous period.

A total of 22 wells were connected to the system, which represents a 57% increase over the third quarter. In 2009, Atlas connected approximately 100 wells to the system and with the increased drilling activity we are currently analyzing over 40 well connects opportunities as of February. We believe that this is a very positive sign for our volumes moving forward

Atlas also entered into an agreement with OLC [ph] operating company of Southern Kansas. Atlas will provide processing and a pipeline connection to OLC’s existing system, which currently moves over 18 million a day. We will begin seeing these volumes in June of this year. OLC has over 70,000 acres held by production and an additional 140,000 acres under lease. OLC plans to drill 120 wells over the next five years. This new gas will help Atlas continue to grow its business in western Oklahoma and Kansas.

At our Elk City/Sweetwater system, we moved volumes of approximately 253 million per day, a 20% increase from the prior quarter. During the fourth quarter, we saw the return of previously shut in production and we also receive volumes into our gathering system from our partner in the Sweetwater processing plant TVR [ph].

Additionally, we produced an average of 10,625 barrels per day of NGLs during the fourth quarter, which is comparable to the prior period. 10 wells were connected into the system during the quarter, up 38% from the prior quarter. The Granite Wash continues to be the area that everyone is talking about around the system.

We are very excited about our current agreements with existing Granite Wash producers and believe we can accelerate our position in this area, in the coming months. The producers anticipate bringing new Granite Wash production on starting in March with additional wells being completed throughout the second and third quarters.

Our Midkiff/Benedum system, gathered volumes were 156 million per day, a 6% decrease from the prior quarter. NGL production was 22,000 barrels per day, an increase of 10% from the prior quarter. The increase in NGL production was related to the start-up of our consolidator plant, which recovers a significantly higher percentage of ethane.

Condensate production totaled 788 barrels per day in the fourth quarter, which is down 60% as compared to the third quarter. Condensate production at our Midkiff/Benedum system is seasonal with the winter condensate volumes roughly half of what is produced during the summer months. The Midkiff/Benedum system also completed a total of 24 new well connects in the fourth quarter compared to three wells connected to our system during the third quarter.

Our partner, Pioneer expects to drill 425 wells in 2010 and the second largest producer, CONSUL Energy plans to connect approximately 140 wells in 2010.

In the fourth quarter, we completed the construction of our 150 million per day consolidator cryo plant at our Midkiff/Benedum system. The plant has increased NGL recoveries, lower ongoing maintenance capital requirements and also provides us with an additional 40 million per day of processing capacity on that system. As Gene mentioned, we are very optimistic about the success of this project based upon the publicly announced drilling plants of the producers on the system.

Within our Velma system, we gathered approximately 78 million per day, a slight decrease from the prior quarter. We recovered 8,450 barrels per day of NGLs which is a 5% decrease over the third quarter. Condensate production fell by 7% in the fourth quarter with a total of 360 barrels per day. From a commercial standpoint there were four wells connected to the system during the quarter.

The Laurel Mountain gathering system continues to show growth with a throughput of approximately 108 million per day in the fourth quarter, up approximately 1% from the third quarter. We are anticipating steady increases through our 2010 as projects are completed and drilling plans accelerate.

The Stewart processing plant in Washington County, VA [ph] is on line. The Robin Hill plant is expected to be on line in March. And the Fayette Shale looping project should be completed in the second quarter. These projects should add over 20 million per day of additional volume when they are completed.

Atlas Energy is expected to greatly expand its development of its Marcellus Shale position in 2010. And Laurel Mountain’s throughput volumes will directly benefit from their progress this year.

In summary, in the fourth quarter, we dealt with several weather events that led to volume freeze offs that adversely impacted our system in the Mid-Continent. However, we believe we have reached a level where we will see steady growth in our gathered volumes across all our systems. We have realized an increase in the NGL production through the increase recoveries at our consolidator plant and increases in the Btu content of wells being connected into our other systems, particularly, the Granite Wash wells.

We are looking forward to the partnership build-out and the Atlas Energy’s continued progress in the Marcellus Shale wells this year. We are excited about the drilling plans of Pioneer and the other producers in west Texas. We are also pleased with the OLC operating agreement which will add volume to our system as we expand in the Kansas and participate in their drilling growth.

Lastly, in the Mid-Continent region, we have experienced an increase in well connects of over 100% and we continue to see accelerating producer interest in connecting to our systems in 2010.

That concludes my remarks and I will turn the call over to Eric Kalamaras, our Chief Financial Officer.

Eric Kalamaras

Thank you, Glenn. Thank you, everyone for joining the call this morning. This quarter, we continue to work aggressively to position our assets (inaudible) they can benefit from higher cash flows in 2010 and beyond. In addition to the positive operational review that Glenn just gave, I am equally as excited about our many of our financial accomplishments we have achieved this quarter, but also the outlook for 2010.

For the fourth quarter of 2009, the Partnership reported recovering adjusted EBITDA of $51.3 million quarter. This compares favorably to recurring adjusted EBITDA of $42.4 million we reported in the third quarter of 2009. For comparative purposes to the third quarter, we have 25% sequential quarter increase in the current adjusted EBITDA, a 21% increase versus one year ago.

To arrive at recovering adjusted EBITDA, we exclude non-recovering items such as gains from asset sales and legacy derivative settlements. Given the significant changes in our business over the past year, we believe recovering adjusted EBITDA is the best way to evaluate our ongoing operating cash flow.

This quarter, recovering adjusted EBITDA excludes an $11.7 million negative impact of legacy natural gas position, as well as a $1.6 million deferred gain related to our Laurel Mountain joint venture. Including those non-recurring items, fourth quarter adjusted EBITDA was 41.3 million.

For comparative purposes, adjusted EBITDA in the fourth quarter 2008 was 98.3 million. (inaudible) in this quarter’s legacy natural gas settlement. The difference between periods is primarily related to $40 million non-recurring items in last year’s quarter, including the gain from the early repurchased senior notes.

Again from the early monetization NGL hedge positions and then add back of the cost of repurchasing of the money derivative positions. In addition, last year’s quarter included earnings from NOARK pipeline which was sold in May of 2009 and a 100% ownership of the Appalachian gathering system, of which 51% was subsequently contributed to our Laurel Mountain joint venture with the Williams companies. All of these items were partially offset by higher comparable NGL prices between periods. Now, with that all said, let’s look forward.

Thinking about recovering cash flow of our business we’re seeing continued strength in our operations, now with the elimination of the natural gas swaps, as Gene mentioned, and which I’ll address in a moment, we expect EBITDA and cash flow for the second half of 2010 to be much more representative in our current quarterly run rate.

In fact, we assume current natural gas and NGL forward curves persist and assuming only modest growth in volumes, we believe our annual EBITDA could exceed $275 million with distributable cash flow in excess of $160 million.

We believe we could arrive at these numbers by using our current fourth quarter EBITDA of $52 million were $208 million annually, then adjust for the increase in NGL prices.

Our average realized NGL price was $0.97 per gallon in the fourth quarter, and a $0.01 increase in NGL prices raises our annual gross margin by approximately $3 million. Now, NGL prices were up about $0.10 per gallon versus the fourth quarter, so that $13 million annually.

Now, we have to come to volumes. Last quarter, we started the consolidator plant. We’ve had a few weeks of operations in the fourth quarter. We also had previously shut-in gas come back on line. That was also laid in fourth quarter. So, we will see the full benefit of both of those volumes going forward. Now, none of these takes into account, volumes in the Granite Wash, OLC pipeline, any of the other numerous gathering projects Glenn mentioned.

All of these would make up a balance and get you closer to the $275 million EBITDA number that I mentioned. Again, these are cash flows using the current forward coronary and this now represents our expectations for EBITDA, cash flow, earning related measure. However, we believe this is the underlying earnings power of our enterprise today. The bottom-line that we expect to continue to expand our ability to grow earnings and cash flow, and to return value back to the stakeholders and partnerships.

Discussing recovering cash flow of the business is a good lead and one thinking about our hedging program. Executive team remains extremely focused on managing the risk associated with commodity price exposure to increase cash well as stakeholders, as well to meet our balance sheet objectives.

We made significant progress this quarter on a few fronts. First, last quarter, we’ve seen we were aggressively seeking opportunities to take out the legacy gas swaps prior to maturity. And we do so as opportunities present themselves.

In light of the report that we took advantage of the rising gas prices and successfully terminated all the remaining legacy natural gas swaps from February through June 2010. This is a very positive event as we are now receiving significant higher cash flow from our assets.

To illustrate the impact, our current gas prices, the annual benefit of the swaps being terminated increase its EBITDA by approximately $30 million. Next quarter, we will report a $2 million cash settlement for January. That would show open our results. And that will be the last time we address this legacy gas swaps.

Secondly, since the third quarter, we have taken advantage of the forward curve and enter into new hedge positions for liquids production. We are now approximately 64% hedged in the first half of 2010 and including condensate, 15% hedged for the second half of 2010.

More importantly, I’m also pleased to announce that we have executed an arrangement that gives us financial flexibility to hedge up to 80% of our current liquids production for the second half of 2010, using a combination of prod ops and swaps.

We will immediately begin adding to our existing hedge positions, adding this incremental protection will greatly stabilize cash flow and reduce commodity price volatility over the coming quarters. Consistent with our strategy, once we address the balance of 2010, we’ll then begin focusing our attention and adding protection for 2011.

As a reminder, our risk management strategy is to hedge up to 80% of our liquids production during the prompt [ph] year and up to 50% in the following year on a rolling basis. We will do this by using product specific instruments, releasing [ph] crude oils to protect heavy end of the NGL stream as well as condensate. We have included in our press release the summary of our existing hedge positions for 2010.

Our adjusted gross margin per Mcf of process gas in the quarter was $1.03 [ph] versus last year of a $1.08 [ph] compared to the third quarter of 2009, however, our adjusted gross margin increased 37%. This marked increase is primarily the result of higher NGL prices.

Realized NGL prices compared to the third quarter increased 34% to $0.97 a gallon. Also since the end of the third quarter we have continued to see a strong move in relationship between NGL and the crude prices. For comparison, NGL, the crude averaged 55% in the fourth quarter, up from 46% in the third quarter. Recently, the relationship has even exceeded 60%, which is closer to its historical average.

Spot ethane prices continued to trade well as supplies are tighter than were last year and propane inventories are making slightly lows. So, we are seeing nice demand recovery and positive for (inaudible) for NGL pricing, despite (inaudible) picture.

From a cost standpoint, G&A net of noncash compensation expense totaled $10.1 million. G&A was higher than the third quarter due to timing adjustments and accruals true-ups for 2009.

Going forward, we expect full year 2010 G&A to be between $32 million and $35 million. Most of the incremental improvements in the second half of 2010.

Operating expenses for the quarter totaled 50.8 million, include start-up costs related to a consolidator plant, and increase cost incurred keep gas flowing on the system as a result of the coal wave in normal weather. We expect operating expenses to continue at similar levels, although this could be impacted by incremental volume across our systems.

Cash interest expense net of deferred financing costs totaled $27.8 million versus $23.3 million last year. The increase is due to higher LIBOR on our floating rate debt and changes in our credit facility. Comparing to the third quarter 2009, interest expense declined as average debt balances were lower than last quarter.

You may recall we have interest rate swaps that expired this past January, the second tranche that will expire April of this year. The net effective of those swaps expiring will be further improvement in our interest expense by about $12 million annually.

Moving to the balance sheet, looking back at 2009, there is no question that significant progress was made and deleveraging the balance sheet, as we reduced debt by $286 million for the year.

Our debt at December 31st consists of the following. $326 million revolver borrowings maturing in July 2013, $433 million term loan, maturing July 2014, and 495 million of unsecured notes maturing in 2015 and 2018. For the quarter, total average is 5.2 times and debt-to-capital 62%.

While we have made progress in our balance sheet we’re not satisfied with the results and continue to focus on our debt reduction efforts. Since year-end we successfully negotiated the early exercising warrants and reduced the term loan by another 8 million. We have also increased liquidity. Now, currently have $7 million in capacity, available under our $380 million revolver.

Going forward, you can expect continued debt reduction via cash flow, particularly, in the second half of 2010, as the bulk of our capital spending plan is front end loaded.

Regarding capital expenditures, we invested $14 million in growth capital projects and spent 3 million in sustaining [ph] capital in the fourth quarter. This is up from the third quarter as the majority of capital spend during fourth quarter for the completion of the consolidator plant, starting in November, and system expansions and well connections.

In the first quarter, we expect total capital expenditures to be approximately $70 million, primarily for well connection. We have seen a significant increase in drilling in our areas of operation, especially in the west Texas system, related to development of Spraberry plant. Second quarter will be our peak quarter for capital spending, largely from the build-out of the OLC pipeline.

In summary, we continue to focus on our three key priorities. Deleveraging the balance sheet, systematically reducing operating risks, maximizing cash flows from our strategic asset base.

With that I will now turn the call over to Brian Begley, our Director, Investor Relations

Brian Begley

Thanks, Eric. Before we start Q&A, just let everyone on the call know we have members of our management team this morning in different location, so, please keep that in mind as we are responding to the questions. With that, I think we are ready to start the Q&A session.

Question-and-Answer Session

Operator

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

Lee Cooperman – Omega Advisors

Thank you; appreciate your comments this morning. You mentioned based upon the forward curve that EBITDA could run on an annualized rate of about 275 million in distributable cash flow of 160 million. Do you guys have a budget and have your own opinion as to whether those numbers are in line with your expectations above or below, question one. And number two, you were close to 160 million distributable cash flow, how would you see that money utilized between debt repayment and the rest of ratio dividends, and the timing of any rest of ratio of dividend?

Eric Kalamaras

I will take the first question and then the first half of the second question. Regarding the curve, we don’t make expectations as to what we think prices may or may not be, for that matter. So given the sensitivity analysis, that’s a function of where and where prices are today. That being said, we are aggressively looking to protect the current prices and the curve as we enter into our hedge position. The reason being for giving a sensitivity analysis the way I did.

As it relates to the distribution, I think the way to think about that is – or actually cash flow is we’ll look at using discretionary cash flow, primarily to reduce debt. We have continued to say that we like to have debt below billion dollars and continue to focus on doing that. In the second half of 2010 you can expect reasonable amount of debt reduction by a cash flow to help meet our debt reduction efforts. Gene, do you want to address the distribution question?

Gene Dubay

If you want to get a debt below a billion and you’re generating, I guess, 160 million distributable cash flow is equivalent to free cash flow, right?

Lee Cooperman – Omega Advisors

No. That does not include the growth capital spending.

Gene Dubay

I see. So, what would you get your free cash would be?

Eric Kalamaras

Based on the numbers that I gave, Lee, it would be about $100 million.

Lee Cooperman – Omega Advisors

100 million. So basically if you took all your free cash flow the paydown in debt would take you three years roughly to get to your debt level that you’re targeted

Gene Dubay

Well, bear in mind, we’re not assuming any increase in volumes, we’re not assuming any other increase in pricing in those numbers as well.

Lee Cooperman – Omega Advisors

Okay, I appreciate that. So, basically, in terms of dividend, you’re going to pass it on to, Gene, in terms of the timing, likelihood, the restoration is to Gene?

Gene Dubay

Lee, we’ve discussed this previously. Our intention is to ensure that we’re adequately working down our debt level. And at the point where we think we’re achieving that we do want to reinstate a dividend, but we wanted to be sustained. So, we’re going to do that as quickly as possible, but I don’t want to pick a quarter as I’m sitting here.

Lee Cooperman – Omega Advisors

Okay, want to give you a chance to do that in case you change your mind.

Gene Dubay

Yes, sir, I appreciate that.

Lee Cooperman – Omega Advisors

Thanks.

Operator

And our next question comes from the line of Sharon Lui from Wells Fargo. Please proceed.

Sharon Lui – Wells Fargo

Hi, good morning. Just wondering what type of volume improvement are you anticipating for the balance of the year? Maybe if you could just give some color on what you expect the utilization rates for each of your systems to be by the fourth quarter?

Gene Dubay

This is Gene, I will ask Glenn Powell to respond to that, Sharon.

Glenn Powell

Okay, Sharon, I’ll start obviously with the west Texas system which obviously we’re seeing considerable drilling not only from Pioneer and CONSOL Energy but several of our small independents. And then also the other factor that has significantly helped us is that we are now probably the most efficient processing plant in the area. So, we’re anticipating being in about a 90% utilization rate on our west Texas facility due to the additional drilling, due to the possibility that we’re going to get some new packages, I guess, from other competitors. And we feel very confident that we’re going to see these higher volumes on that system.

Then as you move over into our western Oklahoma asset, what we’re seeing, as I mentioned, that our Chaney Dell facility, we had 100 wells connected last year, we had 40 wells that were already working on and evaluating, which this is February, so we’re seeing significant in activity. Then also adding the OLC [ph] operating agreement to our mix and the gas that they’re going to bring in, so we’re very excited about that. Right now, that our two processing plants on our Chaney Dell facility, they’re going to basically be full this year. So we will be moving gas from north down to the south.

Then when you look at the drilling that’s going on in and around the Granite Wash, we’re in a great position, did a several contracts that we have right now, we also not only do we have processing capacity, but we have capacity to bring gas in from the Granite Wash into our Sweetwater complex, into our Elk City complex and also into our Nine Mill complex.

So we’re excited about getting that gas and obviously, it’s very rich, those wells have come on very strong, we’re anticipating seeing the second well coming on, in the Granite Wash in early March and then followed by several more in the second quarter. And then our Velma asset, right now, we’re at around 75% utilization, we’ve seen increased drilling plans from several of the producers and buying their system range in XTO [ph] and then also one of our producers is actually going in and reworking 20 of their wells. So we’re optimistic that we’re going to see probably 80% to 85% utilization on that particular system.

Sharon Lui – Wells Fargo

Thank you, that’s helpful. My other question is in terms of hedging, maybe, Eric, if you could just let us know what the costs was to terminate those legacy natural gas swaps? And also additional details on the, I guess, arrangements that you negotiated to give you some financial flexibility?

Eric Kalamaras

Hi, Sharon, in response to your question regarding the cost of determining of the swaps, for the February through June period, it was about $9.4 million. I’m sorry, second part of your question?

Sharon Lui – Wells Fargo

The second part of the question, I think you mentioned that you entered in some financial arrangements that would enable you to add additional hedges for the second half of the year?

Eric Kalamaras

Effectively, what we got is a credit structure in place with Wells Fargo that allows us to hedge those volumes on either easy swaps or options as I mentioned.

Sharon Lui – Wells Fargo

Okay. And then my last question relates to WPCs recent announcement. If you thought that they have a pipe project with Cabin in the Marcellus? Just wondering, I guess, how you guys determine which projects go into the JV versus outside of the JV?

Glenn Powell

Sure, we have obviously an area of mutual interest and there’s constant communication going back and forth between Williams and Atlas Pipeline, we’re actually pursuing well over 10 different producers and different opportunities in and around our plants to expand that system and Cavat’s [ph] plans stood in very nicely with what we’re planning to do and how we’re building out that particular system.

Sharon Lui – Wells Fargo

Okay. Sorry, just one more, so for growth CapEx, it looks like for 2010, might be around $60 million, just wondering what’s the good maintenance CapEx number.

Gene Dubay

Sure, you can think of maintenance CapEx spending about $50 million.

Sharon Lui – Wells Fargo

Okay, great, thank you.

Gene Dubay

You know, if I can just add on to your question regarding swaps, just bear in mind that the $9.4 million is effectively cash neutral to us because of the use of equity proceeds in our credit agreement meaning that we will add that back for adjusted EBITDA.

Sharon Lui – Wells Fargo

Okay, thank you.

Gene Dubay

You’re welcome.

Operator

Our next question comes from the line of Helen Ryoo. Please proceed.

Helen Ryoo – Barclays Capital

Good morning. First question is on the realized NGL pricing, I guess, you would be pricing most of your NGLs in conduit way and you would be incurring some transportation cost, is that the right way of forecasting your NGL, realize NGL pricing going forward?

Eric Kalamaras

Yes, that’s right.

Helen Ryoo – Barclays Capital

Okay. And then on the increase recovery of ethane in your consolidator plant do you expect your overall NGL barrels to have a meaningfully higher ethane content, relative to what you have before?

Gene Dubay

Glenn, you want to comment on that?

Glenn Powell

I mean basically yes, we had about an increase in about 3,000 barrels at our west Texas facility, which is predominantly made up of ethane. However, realizing that our equity position on that particular asset is really about 18%, 19%, so that 3,000 barrels is the full production, of that we only have about 18% to 19%.

Helen Ryoo – Barclays Capital

Okay, okay, got it. That’s helpful. And then my final question is given the drilling pick up in the rich gas area and your ability to extract greater amount of NGL in your new plant and also I think there was some mention about getting into some volumetric arrangement in certain areas and I guess that would increase your fee-based business mix but could you kind of directionally talk about what this all means to your equity NGL and condensate position compared to maybe earlier last year before seeing the impact of drilling slowdown I would think that given the expected volume pick up and more NGL recovered, whether you see your commodity equity position being somewhat in line with what you had previous prior to the drilling slowdown or at least better?

Glenn Powell

This is the probably the best way to look at all the new feature business that we’re doing. For the most part, over the last year, almost all of our business has been percentage proceeds type arrangements. Because again the strategic nature of our assets and then also the newness of our plants, we are often times more efficient than some of our competitors and so some of the transactions that we’re also looking at to add on to our percentage proceeds agreement is fee arrangements, whereby some of the small gatherers are able to shut down their facilities and actually bring gas to us. And typically, those arrangements are on a fee basis. So as we’re looking forward, everything that we’re trying to do is move more towards fee-based arrangements and also percentage proceeds agreements.

Helen Ryoo – Barclays Capital

Okay. I guess in the past you had more people, but you would probably have more POP and fee going forward?

Glenn Powell

That is absolutely true.

Helen Ryoo – Barclays Capital

Okay. At this point how meaningful is your fee-based I guess, cash flow or gross margin contribution, is it meaningful at all?

Glenn Powell

Yes, it is meaningful, if you look at our systems, you look at the Midkiff/Benedum system in west Texas, it’s a percentage proceed system, you look at our Velma system, it’s a percentage proceed system. And then you look at our Chaney Dell system, which is its about 70% keep-whole but every single keep all contract has a very significant fee component as a part of that and then 30% POP, so a lot of our margin is protected by fees and also protected by percentage proceeds nature.

Helen Ryoo – Barclays Capital

Okay and on Chaney Dell I guess do you charge a fee for the gathering part and then the keep-whole for the processing part, is that the right way to think about it?

Glenn Powell

Again, yes, yes, but realizing over the last year, we’re not entering into new keep-whole arrangements. All these keep-whole arrangements were done prior to our acquisition. So everything that we’re doing going forward does have a fee-based component for the gathering, but also has a percentage proceeds portion of the contract.

Helen Ryoo – Barclays Capital

Okay, I see, with the new volume coming into consolidator with that kind of a mix?

Glenn Powell

New gas, I mean in the consolidator is percentage proceeds, all of them.

Helen Ryoo – Barclays Capital

Okay, got it, all right, very helpful, thank you very much.

Operator

And our next question comes from the line of Gregg Brody from JP Morgan. Please proceed.

Gregg Brody – JP Morgan

Good morning, guys.

Gene Dubay

Good morning.

Gregg Brody – JP Morgan

Most of my questions have been asked, just one, one follow-up. You mentioned that the expansion CapEx is weighted through second quarter, what’s the actual expected number?

Eric Kalamaras

Sure, the growth capital spending is weighted more towards the second quarter, maintenance is largely flat line. On the second quarter capital spending, Gregg, we haven’t given a number. I can say that it would be materially higher than the first quarter run rate. (inaudible) to give a number on the second quarter at this point. Suffice to say that full year we expect capital spending to be under $70 million at this point, so you can kind of back into a number you think third and fourth quarters look a little more like the first quarter, you can probably back into something.

Gregg Brody – JP Morgan

And just from in an ideal world, in terms of expansion increase in your growth CapEx, given that, let’s say you’re in a good financial position to do so and can how much more projects do you think you have out there?

Eric Kalamaras

How many more projects?

Gregg Brody – JP Morgan

Yes, that you can add in terms of -

Gene Dubay

Well, I would tell you the level of ASPs that we’re seeing come in are meaningful in that, meaning the drilling is really picking up in our areas now. With that being said, I can let Glenn to address the projects, but tell you I don’t feel like we’re missing anything in terms of capital budgeted position at this point, but Glenn can address some of the forward projects.

Glenn Powell

Yes, we are definitely not missing anything at this point, but across all of our systems, the drilling activity is up significantly, and just going through each one, west Texas with 425 wells from Pioneer and the 140 wells from CONSOL Energy and then we have seen a significant increase in some other smaller independents and around that system, as Gene mentioned earlier, we can easily see 200 from additional wells from some of our smaller independents. And then going to the Granite Wash that’s just taking off and it’s going to see a ramp up, starting in the second quarter, it’s going to increase in the third quarter and we anticipate it will probably increase even further in the fourth quarter.

And then bringing in the OLC operating gas with OLC operating committing to drill 120 wells in five years, we’re going to see increased activity there as well as we have seen increased activity where there are small independents, several of them working three or four rigs behind our Chaney Dell facility, so we are seeing increased drilling all across all of our systems. So we anticipate that we will see a more well connects throughout the second quarter, third quarter and fourth quarter.

Gregg Brody – JP Morgan

Thank you very much.

Operator

Our next question comes from the line of Carl Siegel [ph] from Credit Suisse. Please proceed.

Carl Siegel – Credit Suisse

Good morning. Just a couple follow-up questions. One is, can you describe just the nature of the commitments, when we think about west Texas, for instance, and the fact that you have more efficient plant to get new volumes into those plants do you have acreage dedication or can you just discuss what kind of commitments you are entering into with the producers to attract the incremental volumes?

Glenn Powell

Yes, we have very significant acreage dedications, going out well over 10 years for some of our producers we have been able to execute because again, we’re much more efficient. Some new agreements, which are extending, existing agreements, expanding acreage, that everything in and around west Texas acreage dedication, everything in and around the Granite Wash acreage dedication and then we have significant acreage dedications really cross all of our systems. All of our new agreements centering around Velma are acreage dedication agreements where we’ve seen increased drilling plans as compared to 2009, so we are in great position from the standpoint of the fact that we have existing processing capacity that’s available for this new drilling to be able to be brought in at not very high cost for us.

Carl Siegel – Credit Suisse

Are there any significant acreage dedications that are either that you may have expiring or from a competitive position, competitors might have acreage agreement expiring that you may be able to pick up?

Glenn Powell

There’s nothing that’s expiring significant in 2010 and there are several opportunities for us that we’re working on right now during 2010 because obviously, we have some plant capacity that we won’t be able to fill up so, we’re definitely working on expanding and getting into some new areas.

Carl Siegel – Credit Suisse

Could you also just discuss how you see Granite Wash ramping up in terms of volume and maybe equate that to the number of wells because it appears that these wells are going to be fairly prolific?

Glenn Powell

Again, we’re going to see several wells in the second quarter and then we’re seeing increased drilling plans for the third quarter, which we anticipate will probably continue into the fourth quarter. Because it is so competitive the producers are giving us information, but they are not giving us long lead information, they are not giving us drilling plans out a year, it's just very competitive, but we definitely anticipate seeing ramp up of volumes in the second quarter, pretty significantly, and then we see increased plans for the third quarter and we anticipate seeing increased plans for the fourth quarter as well.

Carl Siegel – Credit Suisse

Okay, great, thank you.

Operator

Our next question comes from the line of Selman Akyol from Stifel Nicolaus. Please proceed.

Selman Akyol – Stifel Nicolaus

Thank you, good morning. Two quick questions if I may. First of all, on the goodwill and asset impairment charge for $10 million, exactly, what was in there?

Eric Kalamaras

The goodwill and asset impairment was a revaluation of effectively useful life of some of the assets and primarily, is a small pipeline as well; they are ideal, Chaney Dell facility as well.

Selman Akyol – Stifel Nicolaus

Thanks. And then the other question is just as it relates to the drilling plans which you shared with us the public comment, should we expect all of those wells to be hooked into your system or would you expect to be a percentage of those wells?

Glenn Powell

Well, if you are talking about the drilling plans and pioneer, it’s a long-term contract that we have with Pioneer and then the second largest producer that’s committed to 140 wells; those are all dedicated to us as well, so we are confirming the announcements of the producers based on what they have dedicated to us.

Selman Akyol – Stifel Nicolaus

All right, thank you.

Operator

Our next question comes from the line of Teresa Fox from Stone Harbor. Please proceed.

Teresa Fox – Stone Harbor

Thank you. Lots of them have been answered but just point of clarification on the CapEx, so your $60 million to $70 million per year expectation that includes all the new additional wells and what you’ve been talking about in growth in your areas, is that correct?

Gene Dubay

That’s correct.

Teresa Fox – Stone Harbor

That’s correct, okay, and then your January, and there some residual hedging loss that’s going to be put on your income statement, am I correct in assuming just based on the past comments that’s going to be around a $11 million or did you give an amount for that?

Gene Dubay

No, the $11.7 million was, in fact, what were settled in cash this past quarter for the fourth quarter. Going forward what you will see is in first quarter, there is a $2 million negative cash element. That will be it. Everything else, February through June was all terminated.

Teresa Fox – Stone Harbor

Got you, thank you very much.

Gene Dubay

You’re welcome.

Operator

Our next question comes from the line of Marco Russo from Millennium Partners. Please proceed

Marco Russo – Millennium Partners

Hi, good morning. Just circling back on Sharon’s question earlier, could you help provide me of how we should think about the expansion possibilities of the JV with Williams as they pick up more equity, do more JVs or how should we think about is this Atlas E&P does some JVs that would impact you guys?

Gene Dubay

First of all, you start with the area of mutual interest and I don’t want to make an announcement for Williams and I won’t. But the plans are very good and the plans of Atlas Energy, the plans of the LMM Partnership, all fit in well with the growth expectations that we’re seeing, the interest that we see from third parties. So we feel like together as a partnership just the pipelines that we’re building this particular asset and the growth opportunities which there are numerous growth opportunities, several projects that we have in the pipeline that will fit very well as we build this thing out over the next three years to five years. So, we don’t feel like we’re inhibiting ourselves, we’re putting any particular producer in a lesser position than they have right now, we feel like they were building this out very well to be able to bring on these volumes and get these volumes to market.

Marco Russo – Millennium Partners

Great. And then just a refresher then, is there any JV at the Atlas E&P level, that shouldn’t impact you guys, are any of the opportunity that you are pursuing?

Gene Dubay

We see everything going forward as growing together and being able to develop this and move forward in a very positive manner.

Marco Russo – Millennium Partners

Thanks.

Operator

At this time I would like to hand the presentation over to Gene Dubay for any closing remarks.

Gene Dubay

We very much appreciate everybody’s on this call. We know that this has been a very difficult year, and we as a management team are sensitive to the fact that we have a core shareholders group, that we could rely on this year and has demonstrated some confidence that we would execute as we said.

So, looking forward, we do want, it is our intention and goal to see that the shareholder group continues to realize the benefit of our efforts. And we thank you for hanging with us over this period. We look today at a brighter year in front of us and we appreciate your inference, your interest and your attendance today on this call. Thank you very much.

Operator

Thank you for your participation in today’s presentation this concludes the call. You may now disconnect and have a great day.

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Source: Atlas Pipeline Holdings, L.P. Q4 2009 Earnings Call Transcript
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