Atlas Pipeline Partners' (APL) CEO Gene Dubay on Q1 2014 Results - Earnings Call Transcript

May. 6.14 | About: Atlas Pipeline (APL)

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

Q1 2014 Results Earnings Conference Call

May 06, 2014 10:00 AM ET

Executives

Matthew Skelly - Head of Investor Relations

Gene Dubay - Chief Executive Officer

Trey Karlovich - Chief Financial Officer

Pat McDonie - President and COO

Analysts

Derek Walker - Bank of America Merrill Lynch

Jerren Holder - Goldman Sachs

Craig Shere - Tuohy Brothers

Praneeth Satish - Wells Fargo

James Spicer - Wells Fargo

Helen Ryoo - Barclays

Operator

Good day, ladies and gentlemen. And welcome to the Q1 2014 Atlas Pipeline Partners Earnings Conference Call. My name is Michelle, and I am your event operator today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Matthew Skelly, Head of Investor Relations. Please proceed, sir.

Matthew Skelly

Good morning and thank you for joining us for today’s first quarter 2014 earnings call. Before our management team provides comments on our first quarter’s 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, not past events. In this context, the forward-looking statements often address our expected future business and financial performance and financial conditions and often contain words such as expect, anticipate, intend, believe and similar words or phrases.

Forward-looking statements by their nature address matters that are, to different degrees, uncertain and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected in the forward-looking statements. We discuss these risks in our quarterly report on Form 10-Q and our annual report on Form 10-K, particularly in Item one.

I would like to caution you not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The company undertakes no obligations to publicly update our forward-looking statements, or to publicly release the results of any revisions to forward-looking statements, which maybe made to reflect events or circumstances after the date hereof, or to reflect unanticipated events in the future.

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

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

Gene Dubay

Thank you, Matt. And thank you ladies and gentlemen for your participation in our call today. And I specially want to thank all of you who have been so supportive in our company in recent weeks. So far truth and good have prevailed, our stock close last week near three months time, I'm hopeful that partly as a result of this call and a very positive news and results recently announced. APL’s stock price will begin to reflect more of the enormous value that we are producing for our unitholders and other constituency. Our Chief Financial Officer, Trey Karlovich will have some further comments on our financial results shortly.

I am pleased with the results for the quarter and the developments since the close of the quarter which we will spend some time on today. This past quarter our adjusted EBITDA was $90.8 million, our distributable cash flow was $60.8 million and our distribution coverage was 1.09 times. Our leverage ratio should shortly decline significantly because of the sharply increasing cash flow and a reduction in debt as a result of the pending sale add a substantial profit of our non-core 20% interest in the Chevron West Texas LPG line, announced yesterday after the close of the market.

Let me now quickly review our operations. The most salient and [satisfying] fact is this. Despite the enormous increase in processing capacity we have achieved, almost a doubling in the past two years, our plants operate through the quarter at 92% of capacity. Today we are at almost 100% of our capacity of approximately 1.5 billion cubic feet. I am glad to report that our South Texas plant acquired in the last year is now more than three quarters full including [take or pay] commitments and increases in production from our existing and new customers who I am sorry, and increases in production from our existing and new customers should shortly bring this capacity up to almost 100%.

Our other plants, 13 and 14 are operating at or above nameplate capacity, forcing us to offload or bypass significant quantities. This Stonewall plant brought up on this past weekend is fully operational and beginning to process gas. Fortunately, two more new plants are nearing completion to help us feel with the surge in volumes across our systems.

All of our West Taxes plants; our Western Oklahoma plants and our Southern Oklahoma plants have been operating at capacity and we were offloading or bypassing an additional 80 million cubic feet a day in those areas.

Beyond these two new plants that we are building and the plant that just brought into service, we have announced the construction of our fourth plant and those plants cannot come on line quickly enough.

In Southern Oklahoma, our new Stonewall plant was undergoing testing and came into service this past weekend. We were offloading 40 million cubic feet a day in Southern Oklahoma and this gas is immediately available to the new plant. We’re on schedule at this point to get the connector line for Velma to Arkoma completed in the third quarter of this year. The level of producer activity in this region continues to increase and we will need that connector line as soon as possible to take advantage of the new Stonewall plant.

Our margins in Arkoma and in the Arkoma area had picked up from the fourth quarter of last year to the first quarter of this year and we’re seeing that improvement continue into this quarter. The addition of those assets is beginning to have the impact that we had hoped to and now will achieve in Southern Oklahoma.

In West Taxes, producer volumes have build a new Driver plant, several months ahead of our expectations. And we are moving to complete the new Edward plant as quickly as possible. As you’re aware, approximately two weeks ago we announced that our agreement with Pioneer have been extended from 2022 to 2032 and our acreage dedication with Pioneer was expanded in this negotiation. We shared in the same release that we have committed to build yet another plant in the Permian in order to keep up with our customer volumes.

Our plants in Western Oklahoma have stayed at or above capacity for the quarter, and we have remainder capacity into May despite the fact that we lost some 40 million a day of gas being delivered at high pressure that was taken from the system at the end of its contract.

We have been bypassing additional 40 million a day while we worked on the new offload agreements that we expect to get into play shortly. We have every expectation that our Western Oklahoma plants will remain at capacity all year long.

In South Texas, the throughput volumes and take-or-pay arrangements provide us with revenues associated with throughput of 140 million a day. On May 1, the new customer began production delivering 25 million a day which is higher volume than we anticipated. In addition, in South Texas we are in the stages of completing pipe connections to another large producer and we expect to see volumes from this customer of South Texas have an impact in the current quarter.

Our second plant is on schedule to be completed in South Texas in this quarter. Fortunately, since we will need that capacity in the coming months, our sale of the 20% interest in West Texas LPG pipeline will provide us additional liquidity and the company will recognize a substantial gain. The sale of this asset should reemphasize our ability at APL to acquire assets and dispose-off them when they no longer fit with our core strategies to the benefit of our unit holders.

Over the last five years, we have developed or purchased and then sold assets, the net profit of which exceeded $1.1 billion. We now have a company exclusively comprising our core gathering and processing assets, all of which are in great basins, where we enjoy solid producer relationships.

From my vantage point, the progress of our field operations in every area that we operate has been exceptional. The volumes continue to build across our systems, the fundamentals are coming together and the value of those assets are just beginning to have an impact on the company.

I'm pleased with our results and expect even better results for the coming quarters. Pat McDonie, our President and Chief Operating Officer will speak to these operations shortly, after which Trey Karlovich will address financial issues and then we will be ready for questions, for which we have a number of our other officers available to participate as appropriate. Pat?

Pat McDonie

Thank you Gene and good morning. During the first quarter, we made significant progress on our higher return organic growth capital projects along with announcing two additional projects. Prior to providing you an update on our operational results, I’d like to provide you an overview of our progress on these projects.

Our growth projects in West Texas are progressing as expected since our last quarterly update, a portion of our Martin County expansion on the Northern end of our WestTX gathering system is complete and gas flow into the system has commenced.

The growth in volume in this region, which Gene touched on, continues to exceed our expectations. This rapid growth in volume further emphasizes the importance of quickly completing the construction of the previously announced Edward plant. We have substantially all equipment on the site and have made significant progress on the construction of the Edward plant which remains on schedule to begin operations in the September, October timeframe.

Again, due to significant producer activity across our Permian system and more recently an increase in activity in the northern part of the Permian Basin, we announced the commissioning of a new 200 million a day cryogenic processing plant that will be placed in its service in the second half of 2015. This plant will be constructed on the north portion of our gathering system supporting the ongoing development in Martin County and providing substantial operational flexibility. We will have the operational capability to utilize all of our processing capacity across our system, regardless of what area of the Permian Basin, the future growth in volumes comes from.

Fortunately, right now, the growth is coming from everywhere. As you will note on the earnings release, we have formerly completed the formation of the SouthOK region which is a combination of the Velma and Arkoma assets. The construction of Velma-Arkoma pipeline and the combination of assets that will benefit from the diversity of producer supply, it will also relieve residue take-away constraints, it will give us considerable operational flexibility and it will facilitate future growth.

The construction and recently announced startup of the Stonewall plant exemplifies the benefits originating from formation of the SouthOK business unit.

We brought this $120 million a day facility on the line the other day as Gene mentioned with an initial base load volume of between 40 million and 60 million a day. The accelerated growth and volumes from both the SCOOP and Arkoma areas indicates that we will utilize all of the incremental capacity of the Stonewall plant by the fourth quarter of 2014. As a result, we have commenced plans to expand the plant by 80 million a day to 200 million a day. Expect that the expansion of the plant will be completed later this year and will require approximately $10 million in capital from APL.

The construction of our 24-inch pipeline to connect Velma and Arkoma systems is proceeding as scheduled and we have cleared substantial all of the pipeline right away. We continue to expect that this project will be complete in late in the third quarter of this year. As a reminder, this pipeline will facilitate new wells that are being drilled in the SCOOP which are tied to substantial producer commitments. We have made significant progress in building out our gathering footprint to accommodate this production and are very encourage by recent results.

Construction continues on our 200 million a day Silver Oak II processing facility which we expect to be completed in mid-June, we continue to have success in securing supply commitments from producers on our SouthTX system and will complete at least large interconnections during the second quarter.

We are currently flowing gas from one other interconnection and expect the second interconnection to begin flowing gas by June 1st. The interconnections are with two of the largest producers in the Eagle Ford Shale and we expect these volumes to steadily grow through the remainder of 2014 and so the remaining capacity Silver Oak I and a significant portion of the new available capacity of Silver Oak II.

I'll now go into the first quarter operational results. Across our systems, we gathered 1.5 Bcf per day, a 23% increase over the first quarter of 2013. Total NGL and condensate production was 118,000 barrels per day, a 35% increase from the prior year. As a result of low ethane prices we have continued to reject ethane at our WestOK and WestTX and portions of our SouthOK facilities. Approximately 28,000 barrels a day of ethane was rejected during the first quarter and we successfully maintained high recovery percentage for favorably priced propane and heavier NGL products.

I will now provide an operational commercial summary for each of our operating regions. We’ll start with WestOK, gathered volumes on the WestOK system were 532 million cubic feet a day in the first quarter, an 18% increase over the first quarter of 2013. Currently we are moving approximately 485 million a day of low pressured gas from the WestOK system and continue to receive a minimal amount of volume from a high pressure receive point.

If you will recall from the last earnings call we told you that we were losing a substantial package of high pressure low margin gas that we would overtime reprice with low pressure high margin gas. That is occurring as promised and we are significantly ahead of schedule in replacing those volumes because of the continued high level of drilling activity and successful resolve of all producers. Due to the retention of a portion of the high pressure gas on the system and the accelerated increase in low pressure receipts we continue to bypass approximately 20 million cubic feet a day. The bypass would be eliminated when the high pressure gas is fully removed from the system.

We are currently reviewing plant expansion and off load opportunities and we’ll chose the option which presents the greatest long-term value to our unit holders. From a commercial standpoint we connected 101 wells in the first quarter and there are currently 23 dedicated drilling rigs operating within the WestOK region. Producers continue to drill in close proximity to our existing gathering system and utilize pad drilling which reduces the capital required to make these incremental well connections. We’re in final process of the system expansion with the producer which will include a long-term gas processing agreement and a substantial acreage dedication. In addition, we are in final negotiations for a gas gathering opportunity that will anchor the next phase of growth on our WestOK system.

At our SouthOK system we gathered approximately 400 million cubic feet a day during the first quarter. As of late April, we are gathering approximately 418 million cubic feet a day and we’re encouraged by the recent increase in volumes and planned additional drilling activity. As you may remember our contract expired on a significant package of gas on the Velma system at the end of the first quarter. With those volumes now being moved off of the system we’ve begun to back fill that volume with production from our producers in the SCOOP.

In addition, we’re seeing a significant increase in producer activity on the Arkoma segment with volumes currently 37 million cubic feet a day higher than the first quarter average. We expect to exceed 160 million cubic feet a day nameplate processing capacity at the Velma facility in July with excess production being transported on the Velma to Arkoma connector pipeline to the Stonewall Plant for processing late in the third quarter.

NGL production on the SouthOK system was 28,000 barrels per day in the first quarter, a 10% decrease from the prior quarter. The majority of the decrease is attributable to the efficiency improvements made on the Arkoma system during the first quarter as a result of the completion of engineering changes to our Tupelo and Coalgate facilities. This allowed us to recover less uneconomic ethane while maintaining and even increasing our highly economic propane recoveries. In the fourth quarter ethane recoveries averaged 25% and propane recoveries averaged 92%. This improved at a 15% recovery rate for ethane and 92% propane recovery rate in the first quarter.

And we are currently recovering 11.6% of ethane and 93% of propane. Given the fixed recovery contracts structure in place on the Arkoma assets, we retained the full economic benefit from these efficiency upgrades. On a commercial basis we connected 13 wells onto the SouthOK system during the first quarter and we continue to receive gas from wells being drilled behind existing CDPs. There are 21 dedicated rigs currently drilling on the systems, six of which are active on the Arkoma segment, producers on that system are utilizing pad based drilling with approximately four wells being drilled per pad.

Again this approach is more efficient for the producers and that reduces our well connect capital expenditures. We are excited by the increase in activity on this system and working diligently to execute on our growth projects to ensure reliable services to our producers.

We continue to make progress on executing our growth plan in South Texas, we are currently flowing between 125 million and 150 million cubic feet a day and as Gene, mentioned the throughput volumes take-or-pay commitments are providing us with revenues associated with throughput of 140 million cubic feet a day. And as I previously mentioned we have completed in the narrated connection with one of the largest producers in the Eagle Ford and as of May 1st, we are gathering approximately 25 million a day of their gas and that volume will grow throughout the remainder of the year. As second interconnect is under construction, this facilitate the receipt of volumes from another large producer in the Eagle Ford and volumes associated with this connection will commence flow by June 1st. We expect the volumes from this producer to increase throughout 2014 and to fill up the remaining capacity in Silver Oak I and significantly increase utilization of Silver Oak II.

We continue negotiations with other producers for additional packages of the gas and we remain committed to our strategy that will allow us to fill a substantial amount of our 400 million cubic feet a day in processing capacity by the end of 2014. We remain excited about additional opportunities that are available as a result of the ownership of this asset.

I'll now turn your attention to the West Texas system where we gathered approximately 409 million cubic feet a day during the first quarter. A 7% increase over the fourth quarter of 2013. We are definitely pleased with the increase in volumes during the quarter, but we more excited about the recent growth in our daily volumes. We are currently gathering approximately 490 million cubic feet a day, which equates to a processed volume of approximately 455 million cubic feet a day, equal to our current nameplate capacity.

As you may recall, our Driver plant was brought into service in April of last year. And to have the 200 million a day of incremental capacity further utilized within 1 year is indicative of the success of our producers and its estimate to the hard work of our West Texas commercial and operational teams.

This unabated growth in volume is why we are doing everything possible to accelerate the completion and start up of the Edward plant and recently announced the construction of additional plant on the Northern end of our system, which we expect to bring online in the second half of 2015. From a commercial standpoint, the investments we are making in the West Texas system continue to be rewarded by our producers.

As Gene mentioned, we recently executed an extension of our gas gathering process in agreement with Pioneer, extending the term to 2032 and extending the area of mutual interest in Martin and Andrews counties which are a part of the rapidly developing Northern part of the Permian Basin.

We have been successful interacting with other producers and the growth and volumes from these relationships is proportionate to the increasing volume from Pioneer. During the quarter we connected 52 new wells and there are currently 68 drilling rigs operating on our dedicated acreage. We have experienced a dramatic surge in horizontal drilling with the horizontal rig count comprising 50% of all rigs operating in our service area. This represents a 100% increase over the number of horizontal rigs in operation during the first quarter of 2013.

Based upon discussions with our producers we expect number of horizontal rigs and operation to continue to increase. These plants have been substantiated by more than 500 horizontal drilling permits filed in our service area in the first quarter. A substantial increase over the approximately 200 filed in the first quarter of 2013.

That concludes my remarks. And I will now turn the call over to Trey Karlovich.

Trey Karlovich

Thanks Pat. And I also appreciate all of you for listening in today in your interest in Atlas Pipeline. We are continuing to manage our balance sheet in a prudent manner, meaning minimal dilution and lower leverage or pursue our many accretive growth projects that Pat and Gene just covered. We stayed on pace with our overall budget in all areas during the quarter including our projected EBITDA, borrowings and capital expenditures, as well as distributions and coverage.

The preferred unit offering we completed in March added a new component to our capital structure and we believe this is a very good transaction especially for our limited partners which enabled us to fund capital with less dilution in common units while not incurring additional debt.

We expect the proceeds from the sale of West Texas LPG to further reduce borrowings outstanding under our revolving credit facility and pro forma for this transaction our March 31st leverage would have been about 4.5 times. We'll continue to fund our $450 million to $50 million expansion capital budget for 2014 in a manner that minimizes dilution, while working down our overall leverage.

The recent announcements of the new processing facility with Pioneer and West Texas and the acceleration of an expansion at Stonewall with MarkWest do not change our current CapEx guidance for the year. We have a financing strategy that we are executing and with increased EBITDA from recent and upcoming projects, our bank covenant leverage will decrease, while we increase our distribution to $2.60 annualized per limited partner unit or more by the end of the year. Our first quarter results are right in line with this strategy and obviously the proceeds we expect receive on the West Texas LPG sale are part of that plan.

With regards to our first quarter financial results, a couple of weeks ago, our Board approved the distribution $0.62 per limited partner unit which will be paid on May 15th. Our distribution coverage was approximately 1.09 times for the quarter with an approximately $5 million cushion.

As I mentioned, we are right in line with our forecast for the quarter and although there has been a decrease in NGL prices from the time of our guidance in February, we are not making any adjustments to our annual forecast at this change has a minimal overall impact due to our hedge positions. As I have mentioned the last couple of quarters, our hedges have insulated us from pricing particularly propane and that goes both ways.

Our adjusted EBITDA for the quarter was approximately $91 million, an increase of about 34% compared to the same quarter last year and a 5% increase from last quarter. Distributable cash flow was almost $61 million, 40% increase from the same period last year and an 18% increase from last quarter. Distributable cash flow does include our actual incurred maintenance CapEx of a little more than $5 million this period.

As a reminder, we have guided to maintenance CapEx of $30 million to $35 million for the full year and we remain on target in that regard. Most of our routine maintenance is completed in the spring and summer months, as well as early fourth quarter when preparing for winter weather.

Our unhedged gross margin for the quarter was $131 million compared to $91 million in the first quarter of 2013, an increase of 44% and $120 million in the fourth quarter of 2013, a 10% increase. However our hedge settlements were a total cost of almost $10 million this quarter including approximately $3 million on option premiums. Most of the impact was related to propone which settled at $1.31 per gallon on a weighted average for the quarter.

We had approximately 80% of our equity propane position hedged at approximately $0.98 per gallon average price for the quarter and our propane hedges alone resulted in approximately $4 million increase in hedged gross margin compared to our fourth quarter 2013 hedge gross margin, again that’s on propane alone.

As a reminder, the impact of all of our hedge positions has been included in our 2014 guidance. Our fee-based revenues totaled $43 million this quarter which made up approximately 36% of our hedge margin. However this excludes approximately $3 million of minimum volume adjustments that will be invoiced and included in revenues if they are not made up physically in future quarters this year. We continue to expect fee revenues to be approximately 40% of our overall margin in 2014.

Quarterly plant operating expenses totaled $24.6 million and general and administrative costs totaled $11.5 million excluding non-cash compensation for the period. These costs were very much in line with our guidance and our budget.

Interest expense totaled slightly less than $24 million this quarter, as our average debt balance was consistent with fourth quarter of last year and it’s also in line with forecast.

Our growth capital expenditures totaled $125 million this quarter including $2 million contributed to joint ventures. These expenditures include work completed on Stonewall, which just began operations in SouthOK; Silver Oak II and Eagle Ford, which will start up later this quarter and the Edward facility in the Permian coming up later this year.

We have also invested a significant amount in our pipelines and compression including the expansion in the Martin County in the Permian, new gathering lines in the SCOOP and beginning work in right away for our connection of development in Arkoma systems.

In reviewing our balance sheet, we had debt to adjusted EBITDA of 4.9 times that’s calculated under our revolving credit facility and 4.5 times on a pro forma basis for the West Texas LPG facility sale as of March 31st.

As I previously mentioned, we expect our leverage to decrease with the increased EBITDA from our upcoming projects, as well as proceeds from West Texas LPG, while continuing to invest in our current gathering and processing systems with high returning opportunities.

The credit facility also provides an add back to adjusted EBITDA once major capital projects like Silver Oak II, Stonewall, the connector pipeline and the Edward plant come on line. Certain of these add backs will be included in our leverage calculation beginning in the second quarter and will continue for one year from the start of each project.

Our liquidity at the end of the quarter was approximately $460 million, which does not include the $200 million accordion feature associated with our revolving credit facility or the proceeds from West Texas LPG.

With regard to our hedging activities, as I mentioned, our hedge positions results in overall loss of about $10 million to our first quarter distributable cash flow including approximately $3 million cost of option premiums. Looking ahead, we are 71% protected for the rest of 2014, as well as being approximately 49% protected in 2015 and 11% protected in 2016.

All these percentages exclude ethane and each of our hedge positions are detailed in the release we distributed last night. We have not made any changes to our targeted hedge percentages, which we remain in line with and we will continue to layer in hedges over the next three years to mitigate the risk of decline in commodity prices.

Finally I would like to address certain financial metrics which have received some attention in our industry recently, most notably adjusted EBITDA and distributable cash flow. I want to be clear in explaining the bases for each number, which should not surprise most of you.

First, adjusted EBITDA for each period very much resembles our calculation of consolidated EBITDA under our revolving credit facility and our primary purpose for disclosing this amount is to allow user of our financials to understand how our leverage is calculated for our lenders. The only material difference in those calculations from our credit facility is the add back we are allowed under the facility for forecasted EBITDA from completed projects. Otherwise the amount we disclosed is consistent to what our lenders use for evaluating our business.

As for distributable cash flow, we calculate DCF in a consistent manner in order to determine the amount of cash flow our business generates from recurring operations and use this number as a bases for our distribution.

I do not think APL is unique in this matter or this calculation and we explain all the adjustments in our public documents. For example, we decreased distributable cash flow for our cost of option premiums for hedging, which our lenders allow us to exclude from EBITDA so that user can understand how much we are paying for this activity which we believe is the recurring cost of operations.

Another line item in distributable cash flow is maintenance CapEx, which is the cash flow we utilize to maintain or repair our gathering and processing assets. Assuming those costs, meet our GAAP capitalization policy. These costs generally have no or marginal economic returns, but do extend the useful lives of our assets. This is part of the true cost in running our systems. Additionally, we spend approximately $40 million annually on our assets, which we expends on chemicals, parts, materials, supplies and contract labor as operating cost.

These expenditures whether capitalize or expense are what it take us to keep our assets running safely and efficiently. I would also point out that a lot of our assets, particularly compression and processing are new and we adhere specifically to manufacturer recommendations for routine maintenance of this equipment which is how we budget these costs. Those are probably gathering and processing business understands that maintaining your assets and your footprint are essential to the long-term success of your system.

In summary, our first quarter results were right in line with our expectations and our guidance, which was laid out in February. We are excited about our business and our projects. We continue to see robust drilling across our systems and significant growth opportunities in each operating area. We are managing this business for the long-term, building gathering and processing systems that would generate strong returns for our unitholders for years to come.

Our growth and financing strategy, which takes into account all of our outstanding opportunities and obligations for the next few years shows a financially strong partnership with a growing distribution and assets in the best oil and gas places in the country.

This quarter was one step in that strategy and we expect the coming quarters to build on these results. We appreciate your continued interest in APL. That concludes our prepared remarks. And we will now open the call for questions. Mitchell?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). The first question we have comes from the line of Derek Walker from Bank of America Merrill Lynch. Please proceed.

Derek Walker - Bank of America Merrill Lynch

Good morning guys.

Gene Dubay

Hi Derek.

Derek Walker - Bank of America Merrill Lynch

First one from me is just on the West Texas system and the expansion that you guys mentioned for second half of ‘15. You mentioned the associated processing facility would be around 100 million, 120 million. Is there any kind of associated gathering CapEx associated with that? It sounds like this plant is going to be more in northern part than now this is kind of a more Greenfield project and has there been any additional associated CapEx around the gathering site?

Trey Karlovich

Derek, this is Trey. So most of that CapEx is related to our Martin County expansion which we have been incurring and we will continue to incur some of that capital during this year to gear up for the volumes that will come online to fill this new plant.

Gene Dubay

And the new plant I might add is a 200 million a day processing facility, not a 100 million or 120 million a day. This new plant will bring us up to 855 million a day of capacity when that plant comes up in Martin County.

Derek Walker - Bank of America Merrill Lynch

Okay. So as far as the total CapEx spend, it’s just 100, 120 for the project or is there, you are saying is kind of tied in to some of these other expansions as well?

Trey Karlovich

Yes. So it's tied in to the other expansions as well. And Derek, we’ve burdened all of our projects with the cost to connect well and add volume to those projects. So those capital expenditures will be incurred throughout the life of the project. So over a 10-plus year timeframe, but we expect to have volumes almost day one since begin drilling that plant and it includes the volume ramps similar to what we saw with the Driver’s facility and what we're expecting with Edward.

Gene Dubay

Yes, and I think what I might add is that again our system in West Texas is configured so that wherever the growth is and again, in our existing footprint where there is not a lot of incremental large system build out, we can move gas from the South to the North, North to the South et cetera. So it really is looking at our overall very integrated system and moving volumes across that to this new plant. They could be clear on the South and with the plant on the North. So, we have that capability. So to Trey’s point, we do burden well connect et cetera future growth across our system to that, but we expect to fill it from everywhere.

Derek Walker - Bank of America Merrill Lynch

Got it. I appreciate the color there. Just turning over to South Texas. Can you guys just remind us what your utilization assumptions were in guidance and what you're seeing today?

Gene Dubay

So we're right in line with what we --, our guidance is right in line with what we're seeing today. As we mentioned in the fourth quarter call that we had in February, we've signed up several large producers that was going to take some a little bit of time to connect those systems to our infrastructure. That first connection came on line just a couple of weeks ago, we expect another large connection here later this month or first of June.

Derek Walker - Bank of America Merrill Lynch

Okay.

Gene Dubay

So that relates then with how we've guided for the year as well.

Derek Walker - Bank of America Merrill Lynch

Okay, got it. So your Silver Oak I will be cool and your assumption around Silver Oak II as well?

Gene Dubay

Silver Oak II will be fairly not and we expect it to be not full by the end of the year but growing. I think our guidance is in the 100 million to 150 million a day range.

Derek Walker - Bank of America Merrill Lynch

Okay, got it. And then last one for more is just on the preferred. Trey, I mean I guess going forward how do you expect to utilize preferred as a potential funding source as you look either doing equity or ATM or I guess how do you see preferred being sitting in that portfolio of options for you?

Trey Karlovich

It’s definitely an option that we have layered in this preferred offering into our financial guidance, we do not have any additional preferred layered into our 2014 guidance at this point. I think it’s a nice option but most of our financing will take place in more traditional manner.

Derek Walker - Bank of America Merrill Lynch

Got it, alright thanks guys. That’s it from me.

Operator

The next question we have comes from the line of Jerren Holder from Goldman Sachs. Please go ahead, your line is now open.

Jerren Holder - Goldman Sachs

Good morning. Just wanted to start off I guess in South Texas on the minimum volume commitments, if we could get I guess some clarification and the terms there with regards to like for instance what time period do the commitments extend to and whether the 140 maybe increases over time, any additional color there would be appreciated? Thanks.

Trey Karlovich

So the minimum -- our contracts in South Texas usually have annual minimum volume adjustments. Generally those run with a calendar year, they maybe a month or two different but they are 12 months periods. There is no escalation to those minimum volumes over the term of the contract and the producer has that period of time within that contract year to make up any shortfall. Otherwise the shortfall would be invoiced and would be a cash settlement.

Jerren Holder - Goldman Sachs

So every 12 months the [NDC] effectively a reset rate?

Trey Karlovich

Correct.

Jerren Holder - Goldman Sachs

Okay. And I guess on the TexStar JV, how should we think about I guess contribution from that going forward here?

Trey Karlovich

The TexStar JV is primarily related to the gathering, infrastructure in South Texas. There is not a lot in the way of incremental EBITDA from the JV itself other than that JV invest capital to connect to wells or to connect to volume. So, as we expand the top edge system and add incremental volumes rather than spending it as CapEx, it’s recorded as a contribution to the joint venture. So, we included that contribution in our CapEx numbers from a GAAP standpoint; it’s actually referred to as a contribution to the JV.

Jerren Holder - Goldman Sachs

Got it. And then I guess lastly, we saw Bloomberg’s article came out this week about Statoil and Talisman potentially on the Eagle Ford assets; do you guys think that potential sale may lead to a materially pick up and Eagle Ford volumes there as the new polycrylic comes in and pushes production bit more?

Gene Dubay

Well obviously we think if somebody comes in and acquires that interest, we would expect that they will increase the drilling activity. It’s a good position; the acreage position is excellent. Obviously it’s connected our facilities; we have a long-term commitment from both. And we like working with both of them but the sale would not dampen our appetite for additional growth because again if you’re going to make the commitment to buy the acreage, we would expect that the activity would increase.

Jerren Holder - Goldman Sachs

Okay. Thank you.

Operator

The next question we have comes from the line of Craig Shere from Tuohy Brothers. Please go ahead. Your line is now open.

Craig Shere - Tuohy Brothers

Good morning guys. Congratulations on a good quarter.

Gene Dubay

Thanks Craig.

Craig Shere - Tuohy Brothers

So, Trey, it’s interesting the growth CapEx isn’t rising, so if we’ve got 10 million for Stonewall expansion, that extra 80 million a day and then we’ve got the newest West Taxes plant do on line next year. How much do you expect to spend this year on that new West Taxes plant?

Trey Karlovich

The investment this year will be pretty minimal, most of the cost is going to be in 2015. Again we have given a range for our CapEx with 450 to 500 and we are going to remain within that range. So some of our expansion -- some of that cost will be late this year, but again that’s a pretty minimal overall project.

Craig Shere - Tuohy Brothers

Right. So we are comfortably less than 10% of the cost of that new West Texas plant is going to be this year, it’s going to be pretty small.

Trey Karlovich

Yes.

Gene Dubay

And we basically have to buy the site itself and do some right away work et cetera. But as far as the hard asset piece of it is very minimal, so that capital will be required in ‘14.

Craig Shere - Tuohy Brothers

Right. And I understand the contract in terms of South Texas Eagle Ford are perhaps sensitive. Could we assume EBITDA per plant in the $60 million to $70 million area when fully utilized, and do you see any indications that Eagle Ford processing supply and demand can tighten the next year or two such that maybe contracts can eventually move close to that $80 million level that you originally envisioned when you acquired TEAK?

Gene Dubay

I think, it’s going to totally depend. As of right now, and we’ve spoken about this in the past as others, the processing capacity has outpaced the production in Eagle Ford, so obviously volumes at this point are more competitive, so prices are not quite as high as what we’d originally anticipated. Could that rebound? Sure, we have seen forecast that show volumes outpacing processing capacity by next year, but that’s I think yet to be determined. We have a strategy of how we are contracting volumes. Obviously we want long term commitments, but we also want to maximize the fee per MCF that we have in our processing facilities and we'll continue to do that.

Craig Shere - Tuohy Brothers

And how is the commodity component of that mixing and because after the acquisition at TEAK, that condensate part seemed to be a little less than we were anticipating originally. As you deal with new contracts, is it pretty much the same or are you getting something like a 10% or 20% commodity component?

Gene Dubay

The commodity component has decreased from what we had originally anticipated and that has not changed.

Craig Shere - Tuohy Brothers

Okay. On the NGL volumes and SouthOK of -- I think my math is 9.6%. Is that just getting more efficient with the ethane rejection?

Gene Dubay

It is and as I addressed in my comments that's exactly what it is. And we have fixed recovery contracts out there that incent us and give us economic benefit to get down to a certain level. And that's what we've been doing. We've been refining our processing capabilities at the different facilities out there to get as closely in line with what our fixed recovery contracts with the producers are. And at the same time, the balancing act there is to keep as much as propane recoveries as we can possibly, so that we can get the benefit from those propane recoveries under contractual obligations.

And that's what we've been doing and that's why you have seen that reduction in volumes. It's provided us with economic benefit as I said and will continue to do so.

Craig Shere - Tuohy Brothers

Great. And last one from me, have you all put any specific color around the margin uplift that was took with the roll off some of those low margin volumes?

Trey Karlovich

We have not. I mean the difference that you're going from a fee based contract that we were just processing to a full gathering plus processing margin. So again there is a commodity component to that. Generally speaking the incremental volumes would be under our general POP arrangements. If you have a fee component associated with it, but it has POP on top of it.

Gene Dubay

And this is Gene Dubay, we will probably be able to talk more in next call about prospectively about WestOK. As Pat mentioned, we're looking at offloads and/or new capacity in WestOK depending on what we see the volume have come up against data faster than we expected. So we’ve got to make a decision internally about whether we're going to add capacity or we're going to enter into these offload agreements.

And that will give us more clarity with regard to our margins through the rest of this year and next year in WestOK operation.

Craig Shere - Tuohy Brothers

Great. I will look forward to it. Thank you.

Operator

The next question we have comes from the line of Praneeth Satish from Wells Fargo. Please go ahead, your line is now open.

Praneeth Satish - Wells Fargo

Hey guys good morning. Could you just review what portion of Silver Oak’s capacity is supported by the MBCs? Is that the full 140 million cubic feet per day that you referenced?

Pat McDonie

No, about 60% of the Silver Oak I capacity is under minimum volume commitment.

Praneeth Satish - Wells Fargo

Okay. And how does that rate on the MBC compared to what you normally earned on processing contracts in the region?

Pat McDonie

You mean, how is the price that we actually give?

Praneeth Satish - Wells Fargo

Yes.

Pat McDonie

Yes, that’s the same.

Praneeth Satish - Wells Fargo

It’s the same, okay. And then on the new South Texas contracts that were signed, are these 100% fee based and do they have any MBCs associated with them?

Trey Karlovich

They are fee-based; they do not have minimum volume commitment.

Praneeth Satish - Wells Fargo

Okay. And then the rate on these contracts, are they comparable to what you're getting right now on your existing contracts or you had to lower the rates a bit to be competitive?

Trey Karlovich

They’re comparable, obviously as I mentioned, it has gotten more competitive in South Texas and continued to be competitive as production is not met processing build out. So we're not talking about step changes.

Praneeth Satish - Wells Fargo

Got it, okay. And then just lastly for the two new Permian processing plants that are being built, you mentioned that they could get to capacity around 12 months like the Driver plant. Do you also expect the economics and the returns to be similar to the Driver plant?

Trey Karlovich

Yes. I mean the gas that will be filling those facilities is under the same contractual structure that the driver and all our pre-existing plants are. So, the economics are basically the same. And again, it’s the gas from all over our system from the variety of producers that currently fill our facilities. So the economics do look very favorable and they are the same.

Gene Dubay

And Praneeth to add to that, our contract with Pioneer over the next 10 years has not changed. The incremental had some small cheap tweaks to it from an economic perspective, but through 2022 the economics does not change from what we had originally.

Praneeth Satish - Wells Fargo

Okay, great. Thank you.

Operator

The next question we have comes from the line of James Spicer from Wells Fargo. Please go ahead.

James Spicer - Wells Fargo

Hi, good morning. Most of my questions have been answered, but just a couple of additional ones here. You mentioned that you expect leverage to decrease here going forward. Can you quantify that a little bit in terms of what you are targeting and timing for when you might reach that target?

Trey Karlovich

So James we’ve said this in our guidance we’d like to be at about four times by the end of the year. We are on pace, obviously there is three quarters left, but we had everything we need to do in the first quarter so far the second quarter from an operation standpoint is right in line, obviously the sale of West Texas LPG helps in that matter. So, we are looking to be close to four times at the end of the year and that’s really what our target is.

James Spicer - Wells Fargo

Okay. And I apologize if I missed this, but did you talked about what or can you tell us what the LTM EBITDA was from the West Texas LPG pipeline?

Trey Karlovich

We haven’t given that number publicly James, what I can say is we invested $85 million in it and it was about 10 times multiple and it’s been running at that level since the investment.

James Spicer - Wells Fargo

Okay, great. And then finally can you just tell us where you stand today in terms of overall contract mix, your fixed fee versus commodity and where do you see that trending overtime?

Trey Karlovich

Right. So we were at about 36% fee during the quarter, but we expect that to be about 40% for the year. As a reminder, on June 1st our keep-whole exposure goes from about 16% or 17% today down to probably 2% or 3% with the conversion of the SandRidge contract. So we’ll really be about 60% POP, 40% fee that will have inflow a little bit as we increase volumes on our fee-based system which are Southern Oklahoma and South Texas that number could come up as we increase volumes in Western Oklahoma and West Texas, the POP number could come up. So we’ll be probably in that 60-40 range both ways.

James Spicer - Wells Fargo

All right, thanks a lot guys.

Operator

The next question we have comes from the line of Wayne Kupferman from (inaudible) Capital. Please go ahead, your line is now open.

Unidentified Analyst

Hi guys. You got most of my questions so I just wanted to clarify some because I might have missed it. SouthOK I or whatever Silver Oak I you said in early June it’s going to be full or pretty much full, is that what you’re saying?

Gene Dubay

No, we’re not saying in early June it will be full. What we’re saying is the second interconnect with large interconnect will be flowing June 01 and as that producer brings up volumes in addition to the producers that we’ve already connected and started flowing gas in May. Over the summer months they will fill the remaining capacity at Silver Oak I and build volumes into the capacity at Silver Oak II.

Unidentified Analyst

Yes. But it doesn’t get fit at Silver Oak I, it will pretty full in June?

Gene Dubay

Yes, we would expect it to be pretty full in June, but I can’t sit and tell you we will be full in June because the producers have lead way on what volumes are going to give us and they’ve told us that they will ramp up volumes over those months as their drilling program and the results gives them incremental volumes they will give those volumes to us.

Unidentified Analyst

So those contracts that you signed with these guys that you expect to fill up the first one, are just you expect the volumes to increase beyond Silver Oak I and moving to Silver Oak II as they continue to ramp?

Gene Dubay

That’s correct.

Unidentified Analyst

If the same producers just continuing to ramp not you will need new producers to get Silver Oak II started?

Gene Dubay

That’s correct.

Unidentified Analyst

Okay. Thanks.

Operator

The next question we have comes from the line of Helen Ryoo from Barclays. Please go ahead. Your line is now open.

Helen Ryoo - Barclays

Thank you. So a question on Stonewall expansion to 200, when do you expect this [plant], this new capacity to fill up and how much of that is driven by a SCOOP activity and also could you maybe talk about acreage dedication you have from the SCOOP area?

Pat McDonie

Well, we are going to startup the second -- 80 million a day late this year, lets’ just call it in the December timeframe and what we would expect would be for that incremental capacity to be filled up by the third quarter of 2015 to the fourth quarter of 2015. As far as acreage dedication, we have had -- we have different contractual arrangements in quote the SCOOP. We have had these long term dedications from various producers before the SCOOP was ever talked about or discovered. And we still have those dedications and some of those parties are actually exploring and drilling in the SCOOP now.

The new dedications I think is what you are referring to and we’ve had two major acreage positions dedicated to us over the last eight months and both of those parities are actively drilling and we are receiving gas from both of them and they are drilling incremental wells. And again, as I referred to in remarks, the results from those initial wells are very positive. We continue to build out our gathering infrastructure there. And as far as a percentage of volume that will be contributed from the SCOOP versus the Arkoma, right now I would say that it’s probably in that 60-40 range but filling up the incremental capacity, probably 60% of that from the SCOOP and 40% of that from the Arkoma area.

And obviously gas prices dictate a lot of when the drilling or the incremental drilling will be done in the Arkoma and gas prices stay where they are at or increased; that could change dramatically. We could see an increased level in the Arkoma, which we are seeing right now. And it could also bring in that timeline for when we would need to add incremental capacity in the Arkoma area.

So, very positive of both areas; very high level of activity in both areas; and frankly, the producers’ results in both areas have been outstanding.

Gene Dubay

Yes, this is Gene Dubay, I might add to that as Pat said, this is a work in progress that producers are really just now getting in these areas, their results have been very positive, but because they’ve been positive, things might happen more quickly than we're anticipating. We've been somewhat conservative in what we've laid out, but we could feel a whole lot better about this, I mean we feel very good about this but could we could feel even better in a very short period of time.

Helen Ryoo - Barclays

That's very helpful. Thank you. And do you need to spend additional gathering, additional capital on gathering lines in order to bring back SCOOP and Arkoma volumes into the plant expansion?

Gene Dubay

The capital costs that we have in the budget -- are in the budget and if the volumes come up more quickly than we have anticipated, they will be coming up to the projects that we already have in the budget. So, we will not be adding as we sit here today, incremental capital to the costs that we have described in the budget for this year.

Helen Ryoo - Barclays

Got it. And then just last one. I guess you've been talking about some of the short term volumes going away and they are the low margin volumes. So, ultimately you will benefit from replacing those volumes going away. But just on the high level, I guess are these in general third-party plans offloaded volumes, just like you guys offload volumes to third-party while you wait for your upfront to come on line; is it pretty much the same dynamic when these volumes show up and then go away.

Gene Dubay

Not exactly. I mean, the volumes we're talking about and you are referring to are in Western Oklahoma. And we had a producer that basically dropped a gas off at our processing facility. In other words, we didn’t have to put any gathering infrastructure in place then to capital necessarily to connect our wells et cetera. They extended all the capital and brought the gas to our facility. In this particular package of gas, all we did was processed for them and they [took] in kind their products (inaudible) the plant. So, we had minimal capital invested. We received a processing fee only. That gas is now going away to a third-party processor which we are fine with because as part of that, obviously, it frees up the capacity at our facility; that gives us benefit of fully loading gas that we have been offloading in to our processing facility. And we're getting the full value chain on that gas, gathering, treating, compression, processing et cetera. So rather than have to pay somebody a portion of that to offload that gas, we will now receive 100% of that revenue stream.

Helen Ryoo - Barclays

And do you have any other than the ones that you have articulated, do you have any other, the short-term sort of volumes that may go away in the next 12 months or 18 months time?

Gene Dubay

No, we don’t. The one at Velma and the one in Western Oklahoma are really the only material volume commitments that we have that are going away; everything else is tied up and will be for quite a while.

Helen Ryoo - Barclays

Got it. Thank you very much.

Operator

I would now like to turn the call over to Gene Dubay for closing remarks. Please go ahead.

Gene Dubay

Ladies and gentlemen, thank you very much for being with us today. I would like to point out one thing as we close, we really everyday about the volume of oil and gas that’s being produced in this country, the increases in the volume of oil and gas, we read about the decline in the volumes of oil that we're importing every day. We read about the improvement in our industrial infrastructure that is just having. This company, Atlas Pipeline Partners is an essential cog in this machine that is creating this benefit for the country. I am extremely glad to be here. I think we all face a great future with this company. And I appreciate your support as investors. Thank you very much.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you for joining and enjoy the rest of your day.

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