Brian Begley - VP, IR
Gene Dubay - President & CEO
Glenn Powell - COO
Eric Kalamaras - CFO
John Tysseland - Citi
Sharon Lui - Wells Fargo
Atlas Pipeline Partners, L.P. (APL) Q1 2010 Earnings Call May 5, 2010 9:00 AM ET
Good day, ladies and gentlemen, and welcome to the first quarter 2010 Atlas Pipeline Partners earnings conference call. My name is Amity, and I will be your operator for today. Later we will conduct a question-and-answer-session. (Operator instructions) I would now like to turn the conference over to Mr. Brian Begley, Vice President, and Investor Relations. Please proceed, sir.
Thank you. Good morning and thank you for joining us for today’s call. Before our management team provides comments on our first quarter results, I’d like to remind everyone of the following safe harbor provision.
During this conference call we may make certain forward-looking statements, that is statements related to future and not past events and in this context forward-looking statements often address our expected future business and financial performance and financial condition often contains and often the same words such as expects, anticipates, intends, believes, and similar words or phrases.
The 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 events and results to differ materially from those projected in the forward-looking statements. We discussed these risks in our quarterly report on Form 10-Q and our Annual Report also on Form 10-K, particularly in Item 1.
And I 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.
And lastly, managements presentation this morning includes references to such items as adjusted EBITDA and recurring adjusted EBITDA, as well as attributable cash flow which represents non-GAAP measures, a reconciliation of these non-GAAP measures is provided in our financial tables of our first quarter earnings release as well as our Form 10-Q.
With that, I’ll turn the call over to our Chief Executive Officer, Gene Dubay’s remarks.
Thank you, Brian. Ladies and gentlemen, thank you for your participation and your interest in Atlas Pipeline Partners. Since our last call this past January, there have been a number of very positive developments for Atlas Pipeline. The announced joint venture encompassing Atlas Energy and Reliance Industries has tremendous positive implications for Atlas Pipeline. We expect that the new drilling program will bring volumes to the infrastructure earlier and more robustly than we would have otherwise seen.
Result for Atlas Pipeline is that we will have a major position and what is certainly the most significant gas development play in lower continental United States. The potential for growth for Laurel Mountain joint venture with Williams should surpass anything we’ve experienced.
We are enormously pleased that across our field operating areas we saw a significant increase in drilling activity in the first quarter and the result of that activity will become evident in the second quarter and beyond. Our core acreage positions in Oklahoma and Texas are in liquids rich areas that are the focus of the exploration and production companies development activities and in West Texas our consolidated plan, which became operational in November continues to operate at or above our expectations.
Our Chief Operating Officer, Glenn Powell will speak to you shortly in greater detail about the activity we are seeing in each of our operating areas and the volumes gathered and processed in each of those areas. Though we are generally pleased with the operating results of the first quarter those results were adversely influenced by the colder than normal winter weather which affected operations across Oklahoma and West Texas.
Our financial results were also negatively impacted by the legacy commodity positions that we have spoken to you about previously, but the second quarter is the last quarter for which we have significant exposure to the legacy commodity positions. We will begin the third quarter without the encumbrances of prior hedging decisions. We have made a great deal of progress in the past year and we believe that we could not choose better operating areas for our gathering and processing business.
Certainly challenges remain; we need to manage our business, so that we can take advantage of the opportunities which are presenting themselves to us in the Marcellus and mid-continent areas. We’ll need to improve our balance and begin a distribution. We believe that this business will flourish if we maintain our focus and the necessary discipline in our decision making and we will do that. Our vision anticipates that we will grow this business in a manner that overwhelmingly benefits our equity investors and the shares returns of our debt holders.
I’m now going to ask Glenn Powell, our Chief Operating Officer to talk you about the performance of each business unit. Thank you.
Thank you, Gene. The announcement concerning the Atlas Energy joint venture with Reliance and the increased drilling activity in all of our operating areas, will lead to volume growth in the periods ahead. During the first quarter we have seen increases in rig activity in the Sprayberry and in the Granite Wash. We have also seen steady improvement in the number of rigs working in all of our operating areas. The success from running our mid-continent assets is efficiently and as reliably as possible allowed us to transport approximately 787 million cubic feet of natural gas per day and produced approximately 54,100 barrels per day of NGLs.
Additionally we recovered 2400 barrels per day of condensate. We connected 75 new wells into our mid-continent gathering systems during the quarter. At our Chaney Dell system, we gathered approximately 222 million per day in the first quarter, which is down slightly from the volumes gathered during the fourth quarter of 2009. NGL production was 12,580 barrels per day, a slight 3% reduction as compared to the production in the fourth quarter of 2009.
Condensate production was 759 barrels per day. A total of 28 new wells were connected to the system during the second quarter. In 2009 Atlas connected approximately 100 wells to the system and with the increased drilling activity we are currently analyzing our 50 well connect opportunities. There are currently 18 dedicated rigs working behind the system.
The construction related to the wealthy operating agreement we discussed last quarter is progressing well. We will begin receiving 5 million to 6 million a day in June and approximately 12 million to 13 million per day of additional volume in November. Atlas is proving processing in a pipeline connection at (Inaudible) existing system which currently moves over 18 million a day.
(Inaudible) has over 70,000 acres held by production and an additional 140,000 acres under lease. (Inaudible) plans to drill 120 wells over the next 5 years. This new gas will help Atlas to grow its business in Western Oklahoma and in Kansas.
At our Elk City/Sweetwater system we moved volumes of approximately 228 million per day and 9% decrease from the prior quarter we produced an average of 9400 barrels of NGL during the first quarter a 12% decrease from the prior quarter. Condensate production was 480 barrels per day which is approximately 100 barrels per day higher over the fourth quarter of 2009.
Seven wells were connected into the system during the quarter, the liquids rich Granite Wash continues to be active with several new wells coming on in the second and third quarter. We are continuing to accelerate our position in this area through new contracts. The producers have brought on new Granite Wash production since the first quarter and we will report on this new production in our next earnings call. The producers have increased their drilling plans and there are currently 16 dedicated rigs working behind this system.
On our Midkiff/Benedum system gathered volumes increased to 158 million per day, a 1% increase over the prior quarter. NGL production was up to 24,400 barrels per day and condensate production decreased to 690 barrels per day. The consolidate plan continues to exceed our expectations in with the primary driver behind the 11% increase in NGL production over the prior period.
The Midkiff/Benedum system completed a total of 37 new well connects in the first quarter. Our partner Pioneer expects to drill 440 wells in 2010, and the second largest producer Contact Energy projects to drill approximately 150 wells in 2010. Currently there are 60 dedicated rigs, working behind the system.
Within our Velma system we gathered approximately 73 million per day, a 11% increase over to the first quarter of 2009. We recovered 7800 barrels per day of NGLs and 4480 barrels condensate. From a commercial standpoint there were three wells connected to the system during the quarter.
Key producers are reworking several wells within each recompilation improving the flow and drilling activity has increased, there are currently nine dedicated rigs working behind this system. In our Laurel Mountain gathering system we are anticipating significant growth in the system related to horizontal drilling by Atlas Energy enhanced by the Reliance joint venture and the build out of the Appalachia system.
We are working on several expansion projects and we anticipate completing five expansion and looping projects in 2010. These projects will add additional volumes to the system in 2010. In summary, in the first quarter we dealt with the colder than normal weather in Texas and Oklahoma, which led to volume freeze off that adversely impacted our volumes have or we believe we will see steady growth in our gathered volumes across all our systems.
Comparing the first quarter averages to yesterday’s volumes processed in barrels produced, we are processing over 64 million per day more than the first quarter average and we will be producing over 4000 more barrels per day as NGL’s based on this additional process volume. We continue to realize an increase in NGL production through the increased recoveries at our consolidated plan and increases in the Btu content and the wells being connected into our systems particularly the Granite Wash wells. We are working on the partnership built out with Williams to take advantage of the continued success of Atlas Energy’s drilling in the Marcellus.
We are also pleased with the increased drilling by Pioneer and the other producers in west Texas. The (Inaudible) operating agreement will add volume to our system in June as we expand into Kansas and participate in drilling growth. Lastly in the mid-continent region, we are experiencing an increase in well connects and we continue to see accelerating producer interest in connecting to our systems in 2010.
That concludes my remarks, and I’ll turn the call up over to our Chief Financial officer, Eric Kalamaras.
Thanks, Glenn. And thank you everyone for joining the call this morning. As what Gene and Glenn mentioned, we continue to make significant progress mixing our operational and financial plan and delivering on the value proposition to our stakeholders. During the quarter we continued to advance in our main goal, positing Atlas to benefit from future growth opportunities, in doing so we make further progress on our risk management strategy then not only protects future cash flow, but also gives us additional clarity as we look to reduce debt and increase liquidity, which we did meaningfully during the quarter. Before I address those items further, let’s review this quarter’s financial results.
The first quarter of 2010, in addition to announcing solid EBITDA, we also have positive results on a net income basis with the partnership reporting distributable cash flow of $0.36 per unit or $44 annually and recurring adjusted EBITDA of $50.8 million. This quarters recurring adjusted EBITDA compares favorably to 26.4 million on last year with the primary difference between the two quarters being 73% increase in our realized NGL price.
July, the recurring adjusted EBITDA, we exclude non-recurring items such as gains from asset sales, legacy derivative settlements and other one-time items. We believe recurring adjusted EBITDA is the best way to evaluate our ongoing operating cash flow. This quarter, recurring adjusted EBITDA exclude a $5 million negative impact on legacy commodity positions. In the press release we reconciled the non-GAAP measures including distributable cash flow and recurring adjusted EBITDA.
As I previously mentioned, one of our main primary objectives is to position the partnerships so we can effectively participate in future growth opportunities. And the one way to do that is to protect our cash flow. As I mentioned last quarter, we made the strategic decision to eliminate further impact of legal natural gas loss that were originally intended to hedge our short gas position and keep old contract.
As I also mentioned last quarter, in January, we took $1.5 million cash loss for those positions. In February, we took advantage of the rising gas prices and successfully terminated all of the remaining legacy natural gas swaps from February through June of this year. This was a very positive event as we are now receiving significantly higher cash flow from of our assets. Based upon current gas prices, the annual benefit of the swaps being terminated, increasing EBITDA by approximately $28 million annually.
Last quarter, I said we would immediately begin adding additional hedge protection to stabilize our cash flow and that is exactly what we did. Consistent with our strategy, we added additional NGL and condensate protection for not only the third and fourth quarters of 2010, but also for the first and second quarters of 2011.
With the new protection we have in place, we are approximately 51% hedged for all of 2010 and approximately 30% hedged for the first half of 2011. As you can see we’re committed to adding protections to the business and doing so prudently. In that context, we will continue to entering some additional protection, as we look to foster our leverage, capital spending and distribution reinstatement objectives over the coming quarters.
As a reminder, our risk management strategy is to hedge up to 80% of our NGOs during the prompt year and up to 58% in the following year. We will do this by using product specific options and swaps and no leasing crude oil to protect the heavy end of the NGL stream and condensate.
In our press release we have included a summary of our existing hedge positions for 2010 and 2011. Our realized NGO prices compared to last year’s quarter increased to 73% to $1.5 a gallon. To aid analysts in our press release we provided our unhedged realized prices and we have also included our composite NGO mix from Mt. Belvieu and Conway hubs. Hopefully including this additional information will allow better insight into our prices versus those at the physical hub.
From a near term price trend perspective Atlas is still tight due to plant turn around as we begin to exit the seasonal ethylene and propylene cracking periods perhaps these are not going back online. Continuing to remain constructive on near term NGO prices, as industrial demand remains solidly an expansion territory, which should continue to build well for end-users NGLs.
Our adjusted gross margin per Mcf of processed gas in the quarter, $1.47 versus last year of $0.77, this most increase is primarily the result of higher NGL prices partially offset by lower system volume.
We continue to remain focused on reducing cost to maintain efficiency across our businesses. For the quarter G&A was $9.8 million down nearly 10% from last year, primarily related to headcount reductions. We continue to expect full-year G&A to be between $32 million to $35 million with most of the incremental improvement in the second half of 2010 as we continue to take proactive steps to further reduce these expenses.
Operating expenses for the quarter totaled $15.5 million versus $13.8 million last year, an increase that’s primarily related to increased wages and salaries, higher compression expense and an increase of property taxes. We expect to average between $15 million and $16 million of quarter for the rest of the year.
Interest expense totaled $26.4 million versus $21.1 million last year; the increase is due to higher labor or floating rate debt, some changes in our credit facility despite a lower overall debt balance.
In addition to a higher LIBOR rate, as you may recall we had interest rate swaps that expired this past January and a second tranche that expired in April. The net effect of those swaps will be additional improvement in our interest expense by about $12 million annually. We are now receiving full benefit of those swaps being terminated.
Now moving to our capital structure, as we looked to position the company towards the future growth, deleverage is an important component. During last quarters call, I said we had more work to do and that you could expect further debt reduction. We made additional steps toward that effort this quarter as we’re able to reduce debt and increase liquidity by nearly $50 million. We now have over $90 million availability and our $380 million revolver including approximately $10 million of letters of credit that are currently outstanding.
In March 31, our debt consisted of the following. $280 million of revolver borrowings, $426 million of term loan, $495 million of unsecured notes maturing in 2015 and 2018 and we are compliance with all of our financial covenants with our trialing 12 month leverage being 5.6 times in debt to capital at 62%. Over the coming quarters, we will continue to focus on deleveraging by routine cash flow and on our capital spending.
As we position our business to take advantage of tremendous growth opportunities over the coming quarters and years, continuing to be diligently focus on management returns on our capital spending. We are only spending capital on our highest return projects. During the quarter, we invested $10 million in growth capital to spend about $1 million in sustaining capital. Despite seeing growth for well connections driven by a significant increase in drilling our various operations, especially in our Midkiff-Benedum system related to the development of Spraberry trend.
Our growth capital spending has been slower than original plan, but we continue to expect the second and third quarters to be our peak capital spending periods. We continued to expect mid-continent expansion capital spending to be approximately $50 million in 2010 within our $15 million in maintenance capital spending.
Pursuant to our credit agreement, we can allocate an additional $37 million for Laurel Mountain capital spending in Marcellus Shale this year of which we have spend about $9 million. We continued to work with our partner Williams Companies, evaluating the updated drilling plan with Atlas Energy into joint venture with Reliance Industries. To the extent the amount or timing of that capital spending changes will update the marketplace as we revised budget volumes.
In closing, we continued to advance the business in all aggressively position Atlas Pipeline for growth. We will see to improve the structure and leverage our balance sheet and capitalize on future opportunities to maximize cash flow from our strategic asset base. We remain very enthusiasm about what’s future holds for our business and all our stakeholders.
With that, I will now turn the call over to moderator for questions.
(Operator instructions) Your first question comes from the line of John Tysseland with Citi.
John Tysseland - Citi
My first question is for Glenn. I guess Glenn, when you described that you expect to see volume growth in the second quarter, is that specifically growth of the first quarter results or do you expect that you could show growth of a fourth quarter, where fourth quarter was really not impacted by the freeze-offs and inefficient fees on the plants?
We’ll see growth based of a fourth quarter, when we didn’t have the freeze-offs and like I mentioned, just looking at the first quarter average versus yesterday, we’re at 64,000 a day of process volumes as compared to the first quarter average. So you can already say that we’re seeing that growth and that’s predominantly the Spraberry in the Granite Wash, but we’re also seeing the increases in our other areas as well plus we’ll the add the Ozark Gas starting in May.
John Tysseland - Citi
Then also on your plans, are you seeing the gas get a little bit more richer as we move throughout the year where producers are going up higher Btu content gas or is it stay relatively as same across your system?
We’re seeing more liquids coming in based on these wells that are being drilled and where these producers are choosing to drill.
John Tysseland - Citi
Then are you bumping up against any kind of operational, I guess operational capacity constraints where you have to bypass some dry gas or you able to process anything that’s coming to you at this point?
We’re not having the bypass at this point in this and real benefits of connecting on Chaney Dell system with our Elk City system. We’re able to move gas around in order to maximize the barrels that we’re producing.
John Tysseland - Citi
Then Erick, I guess on the capital side, you’d mentioned that you’re allocating $37 million in terms of Laurel Mountain joint venture. It was my understating that there was a $2 million limit for your covenants on that. Is that a change or what is the limit on how much you can actually invest in Laurel Mountain at this point?
John, you are right. It is $10 million, although the $10 million is effectively rolling over for any unused prior period on an annual basis. So none of the credit facility was used last years in 2009, so we get to roll that over into 2010, so that is probably what you are thinking about.
John, this is Eugene Dubay. We also get to amortize the note that we had with OEMs against the capital in late year, so we got 16 off of that note that we can add to the capital spend.
16 plus the 20 gets you to the 37.
John Tysseland - Citi
Can you talk about the, what it’s like in the capital markets, I mean obviously, the bank markets have loosened up a little bit. Have you had any discussions with your banks about being able to revise some of those covenants and being able to invest a little bit more in Laurel Mountain, or where do you stand in that process?
Sure, what we’re always looking at the marketplace and we are having conversations all the time, we can’t say, whether we will or maybe something in the future relates to that, but I can tell you that we’re very optimistic about Laurel Mountain, and we will do what’s necessary to make sure that we can spend the capital what’s needed there.
(Operator Instructions) your next question comes from the line of Sharon Lui with Wells Fargo; please proceed.
Sharon Lui - Wells Fargo
The question also relates to the JV for Laurel Mountain, just begin, I guess the JV have set a budget for Appalachia spending with the [CRMX]?
Hi Sharon, this is Eric. We don’t have a budget to give this, we’re still working through just some of those things, but when we have something to communicate on that, we will do that.
Hey, this is Gene Dubay, the reliance in the Atlas Energy has things being revaluated seeing that their processes are underway.
Sharon Lui - Wells Fargo
I guess in the event that capital spending should exceed I guess the $30 million some that you have available, what are some of the options that you can pursue you not yet diluted in the JV?
Sure, we have there are really a number of options, that we could embark on. One option would be, to go to the bankrupt for waver on the term loan, if we chose to do that or the credit facility, if we chose to do that; and that would be a solution, one solution and other solution will be to try to revise the entire facility all together, so those of the two that we would think about, but at this point again, the timing and the amount of the capital we don’t want to get curb ourselves in doing that until we have a more refined plans to work with.
Sharon Lui - Wells Fargo
I just turning to the volumes, can you give us a sense of what volumes look like right now in the Elk City/Sweetwater systems? Have they recovered?
Yes, they have recovered. Basically, what you’re looking at right now, yesterday process was around $220 million a day versus $171 per average for the first quarter.
Sharon Lui - Wells Fargo
Then I just guess one more housekeeping item, this $13.4 million that reconciling items for your adjusted EBITDA for those out of money hedges, was that actually recognized in your income statement?
It fits in the other income line. So it does flow through and that is beyond that’s if you recall, it’s primarily to the gas swaps.
(Operator Instructions) You have no further questions at this time.
Well this is Gene Dubay. Ladies and gentlemen, again thank you very much for your interest. We look forward to working with you and we really believe at this juncture that we have a very bright future ahead of us. Thank you very much.
Ladies and gentlemen that conclude today’s conference. Thank you for your participation. You may now disconnect. Have a great day.
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