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

Q2 2014 Results Earnings Conference Call

August 05, 2014 10:00 AM ET

Executives

Matt Skelly – VP, Investor Relations

Gene Dubay - Chief Executive Officer

Pat McDonie - Chief Operating Officer

Trey Karlovich - Chief Financial Officer

Analysts

Derek Walker - Bank of America

Jerren Holder - Goldman Sachs

Craig Shere - Tuohy Brothers

Brian Lasky - Morgan Stanley

Valerie Zhang - Deutsche Bank

TJ Schultz - RBC Capital

Praneeth Satish - Wells Fargo

Helen Ryoo - Barclays

Wayne Cooperman - Cobalt Capital

Operator

Good day, ladies and gentlemen. And welcome to the Second Quarter 2014 Atlas Pipeline Partners Earnings Conference Call. My name is Lacey, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate 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 presentation over to your host for today Matt Skelly, Head of Investor Relations. Please proceed.

Matt Skelly

Thanks Lacey. Good morning and thank you for joining us for today’s second quarter 2014 earnings call. Before our management team provides comments on our second 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, 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 reflects 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 the occurrence of unanticipated events.

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 in 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. Ladies and gentlemen, I was pleased to announce two weeks ago that the distribution to our Atlas unitholders was being increased as a result of our strong performance in the second quarter.

In this past quarter, the company completed two new processing plants and both plants are in full operation today. We expect to complete a third plant in the Southern Oklahoma connector line in the current quarter.

Today, we are processing 1.5 Bcf a day across our systems. That is an increase of approximately 150 million cubic feet a day from the end of the first quarter. In West Texas, the system is operating at the nameplate capacity of 460 million cubic feet per day. We expect that we can add an additional 20 million cubic feet a day over nameplate capacity which we will do to accommodate the growing volumes, but we need to bring the new Edward plant into operation in West Texas as quickly as possible.

As you know, our partner in this operation, Pioneer, has stated that they will require a new plant every 12 months on this system. We intend to meet their requirements. We have a new plant order that we plan to locate in Martin County to be placed into service in 2015.

The growth in the Permian continues to exceed all of our expectations and we are committed to the build out of a system that will meet all of our customer requirements. In Western Oklahoma, we are operating at over a 100% capacity. In addition, the volume of gas we are offloading to third parties has increased to 50 million cubic feet a day. We’re processing additional 480 million cubic feet a day through our owned plants for a total of 530 million cubic feet a day. We’re adding compression and connecting new wells at a pace much faster this year than we had anticipated.

If this system continues to develop and our volumes continue to grow it’s very possible that we will be adding a new plant to this area to meet our customer commitments. In Southern Oklahoma, the new Stonewall plant has been operating efficiently. The total volume across the plant has been running at approximately 410 million cubic feet a day. The plant pipeline connector between the Velma and Arkoma plants should be completed in the September, October timeframes. Our total acreage dedication with producers in the SCOOP area has increased to a total of approximately 400,000 acres. This burgeoning development has given us impetus to add [80] [ph] million cubic feet a day of additional capacity to the recently completed Stonewall plant. We expect that additional capacity which will bring the Stonewall plant to 200 million cubic feet a day to come online prior to the end of the fourth quarter. We will need this incremental capacity and the connector line in the same timeframe to manage the new volumes being brought on to the system from the SCOOP acreage.

In South Texas, we continue to make progress. We’re beginning to see the developments in South Texas that will likely transform that operation and put it on a par with our other operating areas. In July, we have been processing approximately 145 million cubic feet a day. We are pleased with our producer contracts that we’ve signed to-date; the production in this area appears to be catching up to the available processing capacity and we are well positioned in this area to serve our customers.

Our core positions in the four areas where we operate and our customer relations are providing the company with new potential projects for each area. We believe that we are well positioned to provide further incremental service to our customers and bring incremental value to our unitholders.

Pat McDonie, our Chief Operating Officer will now speak more specifically to the performance of each operating area. And he will be followed by Trey Karlovich, our Chief Financial Officer who will describe the quarter's financial results. Thank you. Pat?

Pat McDonie

Thank you Gene, good morning. We continue to see a strong level of highly successful producer activity around our assets, which we expect to continue for the next several years. This activity substantiates our ability to organically grow our asset position with higher rate of return capital projects. Our extremely capable commercial and operational teams have consistently demonstrated their ability to execute on these opportunities.

Long-term dedications provide stability in our future earnings and clarifies our ability to continue to grow. We have made significant progress on our accretive capital projects during the second quarter. Prior to providing an update on our operational results I'd like to provide you an overview of our progress on these projects.

As mentioned on our last earnings call, we are currently executing on three major growth projects in our WestTX region. Our Martin County expansion continues to cross further north towards Andrews County and we continue to add new volumes to this system. This system will be completed over the next few months and will ultimately become a key infrastructure for moving gas to our previously announced Buffalo plant. The Buffalo plant a 200 million a day cryogenic processing facility is expected to be up and running early in the third quarter of next year. As I have previously mentioned this plant along with the Martin County infrastructure build out will provide us with the operational capability to utilize all of the processing capacity across our entire WestTX system regardless of what area to Permian Basin the future growth in volume comes from.

Today we have acquired the Buffalo plant site ordered the plant and the compression and we will begin construction late this year. The third and most crucial WestTX project and Gene mentioned it earlier the Edward plant construction is almost complete. We expect to have this 200 million a day cryogenic processing facility up and running in mid-September. This plant is much needed as we find ourselves with 460 million cubic feet a day of inlet gas volumes and our current nameplate processing capacity of 455 million cubic feet a day. We do have the ability to cross this volume for roughly 10% above our nameplate capacity and have secured offload capabilities to third parties if needed. This will allow us to startup the Edward facility and immediately have 15% to 20% of the new capacity spoken for.

As previously disclosed we have and expect to continue to realize volume growth of roughly 15 million cubic feet per day per month on our WestTX system which will require the construction of a new 200 million a day processing plant every 12 months. The WestOK region is currently continuing to see rapid volume growth on the system necessitating the construction of three new compressive stations and associated pipeline infrastructure. Within the last few weeks $50 million has been approved to start construction on these compression and gathering projects, in order to facilitate our producers needs and is expected to be completed by December 2014. The three compressor stations will include 14 new compressors and approximately 29 miles of steel pipe. This gathering expansion project is expected to provide approximately 15 million cubic feet a day of incremental gathering capacity in order to offer production growth and reduce pipeline pressures.

Due to Atlas's processing capacity limitations, the volumes gathered from this expansion will be offloaded to third-parties for processing. Offloading these volumes will improve producer net bags, enhance customer relations and the gathering system will set a foundation to facilitate future processing expansions.

As you will recall from our first quarter discussion we formed our SouthOK region which is comprised of our Velma and Arkoma assets. With the exceptional results of our producers in both the SCOOP and Arkoma areas, our previously announced Stonewall expansion in the Velma to Arkoma connected pipeline will be very timely to relate expected processing and residue takeaway constraints in this region.

The Stonewall plant began operations in May and is now processing 120 million cubic feet a day. A 80 million cubic feet a day expansion of the plant to be complete later this year and requires and $15 million total investment from the joint venture with MarkWest and $9 million net to Atlas.

Additionally the construction of our 24-inch pipeline which will connect our Velma and Arkoma systems is nearing completion. As a reminder, this pipeline will facilitate new wells that are being drilled in the SCOOP which are tied to substantial producer commitments and will alleviate concerns with residue gas takeaway out of the SCOOP area.

The construction of the Silver Oak II 200 million a day processing facility is complete and we plan to came operational in late June. As mentioned during the first quarter earnings release two to the supply interconnections were completed during the second quarter. These two interconnects are with two of the largest producers in the Eagle Ford Shale. We expect the volumes from these producers to grow steadily throughout the remainder of 2014.

I will now give you the second quarter recap on our operations, across our systems. We got 1.6 Bcf per day, a 12% increase over the second quarter of 2013. Total NGL and condensate production was 128,000 barrels per day, a 4% 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 37,000 barrels a day of ethane was rejected during the second quarter and we successfully maintained high recovery percentages for favorably priced propane and heavier NGL products.

I will now provide an operational commercial summary for each of our operating assets. And I’ll start with WestOK. Gathered volumes on the WestOK system were 554 million cubic feet a day in the second quarter, a 9% increase over the second quarter of 2013. Despite losing 30 million cubic feet a day of low margin high pressured gas late in the quarter we’re currently moving approximately 560 million cubic feet a day.

If you will recall we have roughly 500 million a day of processing capacity in the WestOK region. The growth in volume in our WestOK system this year has substantially outpaced our expectations and so is no sign of slowing down in the coming months. This exceptional growth has necessitated construction of the additional gathering and compression infrastructure that I have discussed in my earlier remarks. We’re continuing to review plant expansion and offload opportunities.

Current economics dictate that offload gas to a third-party, the continued producer success could alter our future needs. From a commercial standpoint, we connected 114 wells in the second quarter and there are currently 28 dedicated drilling rigs operating within the WestOK area. 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.

I'll now move to our SouthOK system. On our SouthOK system we gathered approximately 433 million cubic feet a day into our systems, in our partners’ dedicated system during the second quarter. NGL production on the SouthOK system was 29,300 barrels per day in the second quarter, a 4% increase in the prior quarter.

The majority of this increase is attributable to the start-up with the highly efficient Stonewall plan on the Arkoma system during the second quarter. On a commercial basis, we connected 18 wells on the SouthOK system during the second quarter and we continue to receive gas from wells being drilled behind existing CDPs. There are 20 dedicated rigs currently drilling on the SouthOK system, six of which are active on our Arkoma segment. And then dedicated producer activity, we'll bring a significant amount of incremental gas to our SouthOK system in the third quarter.

We will begin moving gas from our Velma area, we had a connector pipeline to the new processing capacity being constructed at the Stonewall plant. We are excited about the increased producer activity level in the SouthOK system and believe there is a lot of opportunity for future growth by Atlas in this area. Our South Texas area is where we continue to make progress on executing our growth plan. For the second quarter gathered volumes were 118 million cubic feet, a day a 23% increase from prior quarter and we are currently handling roughly a 145 million cubic feet a day. As mentioned earlier, the increase in volume is attributable to the two completed interconnects, the two of the largest producers in the Eagle Ford. Currently the two interconnects are gathering on average a total of 40 million cubic feet a day and we expect volumes from these producers to increase throughout the remainder of 2014. We have also successfully executed an agreement during the second quarter with one of these producers which will bring additional volume in the third quarter.

There are currently 36 rigs operating within six miles of SouthTX system and three rigs are operating on dedicated acreage. We continue negotiations with our producers for additional large packages of gas and we are committed to quickly calling up the remaining available capacity. We remain enthusiastic about additional opportunities that are available as a result of the ownership of this asset.

I will now turn our attention to the WestTX system where we gathered approximately 460 million cubic feet a day during the second quarter, a 13% increase over the first quarter of 2014. We are currently gathering approximately 502 million cubic feet a day which results in a processed volume of approximately 464 million cubic feet a day, equating to 102% of current nameplate capacity.

During the second quarter, eight new compressors were brought online and nine additional compressors are expected to be installed during the third quarter. The additional compressors are to accommodate the continued growth in production as well as helping to reduce field pressure.

In the second quarter, we connected 58 new wells and there are currently 74 drilling rigs operating on our dedicated acreage. We have experienced a dramatic surge in horizontal drilling -- the horizontal rig count comprising 44% of all rigs, operate in our service area, a 21% increase over the number of horizontal rigs in operation in the second quarter of 2013.

Horizontal rigs in operation are expected to continue to increase based upon discussions with our producers. These plants have been substantiated by more than 412 horizontal drilling permits filed in our service area in the second quarter, a substantial increase over the approximately 200 filed in the second quarter of 2013.

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

Trey Karlovich

Thanks Pat. Obviously, we made significant progress in the first half of the year and we are expecting even further progress over the coming months. Our volumes continued to climb across our operating areas and new processing capacity is being quickly utilized.

The cash flow from our many projects is beginning to ramp which translates into an increase in our cash flow available to partners. We recently announced an increase in our quarterly distribution to $0.63 per limited partner unit for the quarter or $2.52 per year. And we remain on target to reach at least $0.65 per LP unit or $2.60 per year run rate for the fourth quarter of this year.

This would be about a 6% increase over our distribution rate last year. We have also seen our distribution coverage come back up to approximately 1.1 times for each of the past two quarters. We currently expect to increase our distribution by at least a penny per unit each of the next two quarters with even higher distribution coverage in each period as we build coverage, which would be in excess of 1.0 times pro forma for the conversion of the outstanding preferred units into common units.

We remain within our guidance ranges as we expect a jump in earnings this coming quarter with full contributions from recently completed projects and producer tie-ins. Additionally, the Edward plant and the Velma to Arkoma connector are expected to provide incremental economics in the fourth quarter as well. We’ve recently approved additional capital projects related to 2014 and ‘15 and we have started incurring some of those costs related to the new Buffalo plant in West Texas, the expansion of Stonewall in Southern Oklahoma and gathering infrastructure to support higher volumes than originally forecasted in Western Oklahoma. We expect to be at the higher end of our growth capital expenditure guidance of $450 million to $500 million if not slightly above, of which we have incurred $270 million year-to-date.

Looking ahead, we see significant opportunities to invest additional capital and high returning projects over the next five to six years in our core operating areas with the potential of gathering and processing two times the volumes currently on our systems, while supporting the production plants of our producer customer base. This is about 3 Bcf per day potential. We’re also seeing opportunities outside of our core operating areas and we’ll pursue such opportunities with fiscal prudence.

With regards to our second quarter financial results, we’ve funded most of our growth capital with the proceeds we received from the West Texas LPG sale for which we recognized a gain of $48.5 million. Additionally, we lowered our outstanding debt balance by about $50 million and with our pro forma LTM EBITDA after removing any earnings contribution from West Texas LPG, we saw our bank leverage decrease to about 4.7 times and it is 4.3 times on a run rate basis.

Based on our earnings and capital expenditure guidance for the rest of the year, we continue to expect bank leverage to be very close to four times by year-end. Our adjusted EBITDA for the quarter was approximately $93 million and distributable cash flow was almost $63 million, both about $2 million higher than last quarter and 8% higher than the same period last year.

Our unhedged gross margin for the quarter was $136 million compared to $109 million in the same quarter of 2013, a 26% increase year-over-year. Our hedge positions cost us about $7 million this quarter, including about $1 million in option premiums as NGL and natural gas prices generally decreased from the first quarter, however remained above our hedged price levels.

Our fee-based revenues totaled $50 million this quarter, which made up approximately 38% of our hedge margin. We continue to expect fee revenues to be approximately 40% of our overall margin for 2014. Beginning in June of this year, our keep-whole exposure has been reduced to a de minimus amount of our contract structure is now approximately 60% of proceeds and 40% fixed fee. This will fluctuate slightly overtime as volumes in our various areas grow at different rates.

Quarterly plan operating expenses total 27 million and general and administrative costs total 12 million excluding non-cash compensation for the quarter. These costs are very much in line with guidance at our budget and represented of our expectations for the remainder of the year. Interest expense totaled 23 million this quarter as our average debt balance was slightly lower than the first quarter, this is also inline with forecast.

Our growth capital expenditures totaled 147 million this quarter, these expenditures include work completed on Stonewall which began operations in SouthOK during the quarter Silver Oak II and Eagle Ford which came online at the end of the quarter and the Edward facility in the Permian. The Velma to Arkoma connector line both coming up late this quarter also incurred expenditures.

We also invested a significant amount in our pipelines in compression including the expansion in the Martin County in the Permian, new gathering lines in SCOOP and additional compression in WestOK to handle increased volumes on that system. Our maintenance CapEx totaled little more than 5 million again this period. We continue to forecast between 30 million to 35 million for the entire year so I do expect an increase in the next few quarters. There were no significant changes to our risk management portfolio as we remain in line with our targets and continue to layer in positions over a three year period based on our forecast of production.

In summary, our second quarter results continue track our financial guidance which was laid out in February. We see a significant amount of opportunity to grow our four assets and continue to deliver a healthy distribution to our unitholders. Our balance sheet is getting stronger as we digest our acquisitions and we will continue to fund our growth capital in a prudent manner. We appreciate your continued interest in APL.

That concludes our prepared remarks we will now open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Derek Walker with Bank of America. Please proceed.

Derek Walker - Bank of America

Good morning, guys.

Gene Dubay

Hey Derek.

Derek Walker - Bank of America

Just a couple of quick ones from me, Trey appreciate the color on the capital program, just have you started looking at 2015 yet and if so, do you have a sense of directionally is it bigger or smaller than 2014, and then as we get in the back half of ‘14 here looking at the funding needs, get the improving balance sheet, get the divestiture to see any equities in the second half or just the ATM is sufficient, any color there would be great?

Trey Karlovich

Yes, so what I can tell you Derek is yes we still expect the ATM to be sufficient to fund our capital needs. We have started to look at 2015 and beyond from a capital expenditures perspective. At this point I can generally say that we should be pretty much in line with what we’ve spent this year. We've had quite a few projects in 2014, we expect to have about the same number in 2015 at this point in time.

Derek Walker - Bank of America

Got it. Thanks, Trey. And just turning to potential condensate opportunities, it looks like volumes are pretty strong here, this quarter. Obviously given Pioneer's announcement and Enterprise's announcement around condensate exports, do you guys see any growth opportunities associated with that across your systems?

Pat McDonie

Well, I think the key to that is obviously condensate is trading at a discount to WTI. And the hope is there is incremental markets via the export to condensate that will close the gap in and the basis differential between the condensate price and WTI. And it certainly has regional values across the different regions that we operate in. But the expected benefit to us is that and in addition to the export piece of it, there is condensate splitters being built which is incremental demand for that product also.

So, over time we would expect an uplift in the value which is beneficial to us especially with our POP contracts and the condensate barrels that we retain as a part of that.

Derek Walker - Bank of America

I appreciate that Pat. Just a final one from me, Pat I believe in your formal remarks just briefly touched upon the ramp on Silver Oak II. You mentioned the connections there and you expect a steady ramp. Do you guys have a sense on what the utilization might be like in the second half or as we exit 2014?

Pat McDonie

I mean, we do expect the volumes to ramp and one of the producers is fracking several wells, which has actually reduced the volume that we're currently getting. And that takes probably another 6 to 8 weeks in the volumes from the new production - over the new wells in addition to the production that is currently off, as a result of that being in that frack procedure makes it hard to really know what the actual volume is going to be. The second producer is also ramping up their volumes; they’re drilling and completing wells. The timeframe for when those wells come on, some come early, some come late, but I mean we obviously expect to fill all the remaining capacity at Silver Oak I and get into Silver Oak II in a meaningful way. And when we talk about we continue negotiations with other parties and you need to think about South Texas those package of gas are very large and we’re down the road very far on a lot of those negotiations and it’s successful, I mean you can bring on an incremental package of 50 to 100 million a day which really puts you in a position where you’re utilizing almost all your capacity. So, it’s hard to give you a firm number for the end of the year but that’s kind of what we’re seeing as we progress throughout the year.

Trey Karlovich

This is Trey. Just to add on to that. The guidance that we’ve laid out, we’re still on track with our guidance for this year and our guidance for next year assume full utilization of the plant by year-end. The full 400 million a day again going through 2015.

Derek Walker - Bank of America

Okay, just 2015. Okay. I appreciate the color there guys. Thanks for the time. That’s it for me.

Gene Dubay

Thanks.

Operator

Our next question comes from the line of Jerren Holder with Goldman Sachs. Please proceed.

Jerren Holder - Goldman Sachs

Good morning. Just wondering if you could start off with maybe expanding on your comments around seeing opportunities outside of your core areas like what regions are we talking about, is this all [GMP] [ph] stuff?

Gene Dubay

This is Gene Dubay. I think our comments were that we had opportunities within our core areas in all other core areas we operate. So we do have other - we are seeing other Greenfield opportunities coming to us. And no, I don't want to get specific about where those opportunities are, but we certainly have opportunities that come from other producers we work with.

Jerren Holder - Goldman Sachs

Okay. I guess maybe switching over to the SCOOP here, we have seen some of your competitors add new plants and some pretty doubled acreage dedication and whatnot. How do you view the competitive landscape out there? I mean I know you have 400,000 acres, but what is your outlook to maybe add on to that over the near-term?

Trey Karlovich

Well, the SCOOP is complicated puzzle, but what we see is a couple of different things. One that we'll just say some of our competitors’ processing capacity is going to get overrun in a short time frame and we are receiving offloads as we speak or on-loads on to our systems from other parties in that area. And we also see that there is a residue gas issued looming on the horizon. And as a result of that, we are picking up incremental packages of wells and acreage and have been able to connect them. And we see additional opportunity related to just the pace of growth and the infrastructural needs that are currently in place and how quickly they can get built to keep up with that growth.

So it's one of the reasons we accelerated the expansion of the Stonewall plan, because we just see a lot of incremental volume and a lot of incremental opportunity and we wanted to make sure that we have a processing capacity and the unique thing and we have spoken to it in the past is that when we moved gas to interconnector line into our Arkoma processing facilities specifically the incremental capacity at Stonewall we don’t have the residue gas [inaudible] issues that other parties are getting ready to experience. So we are picking up additional acreage, we are picking up additional well packages from producers in the area, but we see a larger opportunity and obviously we are positioning ourselves to take advantage of that. And we do see potential for incremental growth in our SouthOK region via the SCOOP development.

Jerren Holder - Goldman Sachs

Thanks for the color. And then I guess lastly just wanted to touch on some of your strategic options in South Texas. Saw couple of other smaller players combined and were able to generate some synergies there. From a competitor standpoint is that something you benefit from because I know you have I guess interests with some third parties or is that something that makes maybe acquire an additional gas packages a bit more difficult and then what are you considering or what are some of your options to maybe get some additional gas packages online or maybe some incremental synergies if you could comment on that?

Gene Dubay

This is Gene Dubay. I think -- we have talked with others about joint ventures. We continue to look at what’s available to us. We do not think that as you say the combinations down there have made our situation less competitive, so we think we are still in good shape to add the volumes that we need to across our system, but as across to systems we are open to discussions with others where it makes sense not only in South Texas, but in other systems. We have got the joint venture with Pioneer and the Permian, we have got the joint venture with MarkWest in the Arkoma. So if opportunity makes sense to us we will follow up on it.

Pat McDonie

And I guess the one thing I would add and one of the things you included in your question was as people combine, obviously we look at it as the elimination of a competitor for volumes of gas; in other words, two became one. So, instead of four guys going now, there is one less. And so, we definitely as Gene spoke to, don't see that harming us, we see it as helping us as far as being in front of customers and competing for packages of gas.

Jerren Holder - Goldman Sachs

Okay. Thank you.

Operator

Our next question comes from the line of Craig Shere with Tuohy Brothers. Please proceed.

Craig Shere - Tuohy Brothers

Good morning, guys.

Gene Dubay

Good morning.

Craig Shere - Tuohy Brothers

Picking up a little on the last question, I think Pat you were commenting that you saw maybe a little less competitive pressure, not necessarily total volumes in the market, South Texas looking for production, but in terms of the number of competitors willing to maybe offer more attractive terms to producers. My question is, can you kind of speak to the supply and demand balance there? And do you see equilibrium potential in 2015? And as we move from an oversupply position and the need to contract up current capacity, how do you think about the terms on the length of your contracting for the rest of say Silver Oak II?

Pat McDonie

I think it's a really good question. And I would say that a little bit different than you said it in the question. I think right now, you have more processing capacity than you do supply, but we do see that balance is changing as obviously the activity level in the Eagle Ford continues to be very robust. And in ‘15, we do see that balance changing where you are in line supply versus available processing capacity and the opportunity to add packages of gas exist. There is not new facilities getting built out there right now.

Obviously, there is a lot of wells being drilled. We see that as an opportunity for us. And when you layer ahead on top of that, the fact that a lot of the original contracts that will put in place when the Eagle Ford was initially developed, starting in late ‘15 early ‘16 et cetera, there are very large packages of gas that become available to the marketplace. But obviously the existing providers, us and others will compete for but we see it as a greater opportunity to secure a significant volumes of gas. And that’s the arena we see forward and obviously we like where our asset is we like our operational capabilities, our processing capabilities et cetera. So, we think that we’ll be positioned very well to take advantage of that marketplace when it occurs.

Craig Shere - Tuohy Brothers

So, are you thinking that maybe keep a little open to try to get better turns into next year or are you thinking you control the duration of contract commitments?

Pat McDonie

Right, I didn’t get to that part of your question. I think it’s a combination. I think dependent upon the producer and the situation; obviously we’re willing to enter into some longer-term arrangements. But certainly in other situations, we’re more intending to doing interruptible or shorter-term deals because we think the value of the marketplace certainly would change over time based on the incremental production available and not the oversupply of the processing capacity. So, we are looking at it as a combination of both short-term and long-term commitments and some interruptible supply with significant packages I guess.

Craig Shere - Tuohy Brothers

Great. And just maybe mathematical, staring with maybe not as large of NGL volumes on the base, but in South Texas, the NGL volume growth sequentially was much greater, I thought on the gas processing volume. Are there any shifts at all in terms of the GPM or the amount of liquids you're handling?

Trey Karlovich

Craig, this is Trey. We actually processed a little bit more ethane this quarter, we did not reject as much that was in conjunction with working with some of our producers in the area that hasn't taken time. So, there was -- that's what the change is. The GPM is generally the same in West Texas, we were just not rejecting at or in West Texas just not processing, we were not rejecting as much.

Craig Shere - Tuohy Brothers

Okay, great. And just across the entire system, are there any kind of ethane trends in terms of rejection or recovery that you can speak off that’s what kind of shifting in any way?

Pat McDonie

Well, I guess the one change that we've seen and that is different than what we have been operating throughout most of the year is in our SouthOK area specifically our Velma assets, we are in ethane rejection now where previously we had been extracting ethane. And so that’s really the change that we see and obviously ethane prices are not that great and we got to the point in that (inaudible) facility where it made sense for us to go into ethane rejection. That’s really the only change across the remaining assets. We continue to reject down at the levels that allows us to get as much propane out of the gas stream as possible and probably we will operate in that mode unless there is a change in the value of gas versus ethane for the foreseeable future.

Craig Shere - Tuohy Brothers

Great. And last question, as you kind of improved your distribution coverage and you improved your credit ratios and worked through all the great organic growth opportunities and try to fill in for the Eagle Ford, is any kind of incremental kind of either Greenfield outside your fairway or M&A off the table for the foreseeable future?

Gene Dubay

This Gene Dubay. I don’t want to say anything is off the table. So if the right opportunity presents itself, we will follow up on it.

Craig Shere - Tuohy Brothers

Okay, thanks guys.

Gene Dubay

Thank you.

Operator

Our next question comes from the line of Brian Lasky with Morgan Stanley. Please proceed.

Brian Lasky - Morgan Stanley

Good morning. Just on your WestOK system, I think you have kind of mentioned that the few quarters how you are offloading a decent amount of volumes and there is certainly potential there to expand at some point in time. I was wondering if you could just help us in terms signpost that you guys are looking at in order to get comfortable with the potential expansion opportunity there.

Gene Dubay

Well I think it’s a couple of things. One, obviously the volume growth has outpaced what our expectations were and therefore going back to the board a couple of weeks ago and get $15 million worth of additional capital to expand our system and our compression capability, et cetera, so obviously a good problem to have.

The thing that's unique out there is that there is available processing capacity with third-parties that we are able to get a very economic rate to offload gas and have it processed. And obviously building an incremental facility seven year to ten year time frame economically and what we are seeing in the volume that we have in excess of our existing processing capacity. The opportunity for us to invest capital build incremental facility is right here on the decision criteria. We're not there yet, we certainly have had a lot of discussion and I can tell you if we weren't able to get to the off load rates that we were, we would be in a process of adding capacity as we speak.

But from an economic standpoint, it's a very close decision and right now we find ourselves in a good situation, where we can offload and wait and observe and ultimately see how the producer perform and how the acreage develops, et cetera. And we have identified how we can quickly add capacity if we need to. And so that's the way we positioning ourselves, again we honestly find it as a good situation to be in. Obviously we would like to process all the gas ourselves, but economics and prudency relative to capital investment will dictate our decision making.

Brian Lasky - Morgan Stanley

And then Trey just kind of figure out on Craig’s question there, really quickly as you kind of look at your balance sheet improves here and you have a good amount of organic projects on the docket. And then you’re also trying to balance the fact that you have the conversion of those units going into next year. How do you guys kind of think about balancing your CapEx budget with your distribution coverage with also getting up to a distribution growth rate that you guys are comfortable with longer-term? How do you want the market to kind of think about that, that distribution growth rate trajectory as you kind of move through the balance of this year and get yourself in a better position?

Gene Dubay

Good question Brian. So, the way that we think about this and look at is twofold. One on the balance sheet side four times leverage is our target. It’s under our bank covenants so that include some project add-backs and little bit of flexibility there from a true leverage perspective. So we’re targeting four times leverage under our bank covenants and we’d like to stay in that four times range whether that’s 3.8, 3.9, 4.1, 4.2 right in that general vicinity as where we want to be on it a go forward basis and stay in that range. Obviously we have a significant amount of growth opportunities that we’re completing this year and we have teed up for next year and going beyond that. We’ll find appropriately to maintain that leverage but again with project add backs that give us some flexibility.

From a distribution perspective we will build some coverage probably higher than 1.1 times over the next couple of quarters, as we ready to phase in to take units, convert those units, they are mandatorily convertible in the second quarter of next year. At this point in time, it is our option we could convert those sooner. Assuming pro forma for the conversion of the units, we want to be over one times covered the next couple quarters so that once those units convert we will remain over one times on an actualized basis, we're going to increasing distribution as I mentioned in our comments are still on track increase our distribution over the next couple quarters and continue to see that increase running through 2015 as well with a target overall coverage of 1.1 times, we will be right at 1.1 times with the conversion to be seen but that’s still what our target is and definitely over one time is covered. I hope that, that gives you a little bit of color.

Brian Lasky - Morgan Stanley

Thank you very much.

Operator

Our next question comes from the line of Valerie Zhang with Deutsche Bank. Please proceed.

Valerie Zhang - Deutsche Bank

Good morning. On West Texas, you are expecting one plan in each of the next five years. Is the current expectation mainly driven by a Pioneer and do you see demands or other producers to drive expansion even further? In terms of cost and the lead time, are there any opportunities to utilize existing infrastructure and therefore low either costs and surely the time of construction for the next five months?

Gene Dubay

I think the several questions within the one question but, and I give that and that's fair because you covered a lot of times important from an investment forward perspective. I would say that over the next five years, we would expect Pioneer to grow quicker than one or third-party producer's volumes are going to grow. But what I will tell you is we've had that expectation for the last two years also. And but frankly the third parties growth and volumes has outpaced Pioneers even with the high level of activity that Pioneer has shown to the marketplace. So is there an opportunity to build plants quicker add additional volumes the answer is yes, obviously there is a lot of activity in the Permian Basin we have 7,500 miles of gathering infrastructure. We see a lot of opportunities and we obviously are in conversations with producers that aren’t on our system and as we expand into north through Martin County and into Andrews County and we expect the activity level to the north of what we have called central part of our system in Midland and Glasgow Counties. We see a lot of incremental opportunities for volume growth in those areas.

As far as acceleration and efficiencies in building plants, the plant lead time right now is very well defined. Obviously we are looking at our system, not only short-term basis but on a long-term basis, in other words the hydraulic modeling of our system is done in such a way that we are looking at where we expect to be in one, three, five years and we are building the right pipeline infrastructure et cetera to accommodate that future volume growth and so from that perspective, you do get more capital efficient as you move out through time as we are spending some of that now, for larger diameter pipe et cetera that will be capitalized in the future.

So when we look at the activity level and the expected activity level it really makes you look at a much longer time horizon and we expect this when we have in some of our other areas and quite frankly I think we have done a very good job of that and we have had a lot of help from our partner Pioneer because they do a great job of long term plan. So, the growth is there we have been in a position very well to take care of it and we think we will be more [performing] efficient as we move forward.

Valerie Zhang - Deutsche Bank

Okay, great. Thank you. Now, on WestOK, the condensate volume increased in the first half of the year. May we expect this growth rate to continue in the second half?

Trey Karlovich

You're looking at Western Oklahoma?

Valerie Zhang - Deutsche Bank

Yes.

Trey Karlovich

So, the condensate, again weather drives some of condensate volumes. We would expect them to kind of -- if you go back overtime and you look at the condensate volume as a percentage of overall gathered volume, we expect that ratio to stay intact by period. So, you can see the seasonality overtime and the ratio of condensate barrels to gather volumes should generally be and about the same that same ratio.

Valerie Zhang - Deutsche Bank

Okay, great. Thank you so much for your time.

Operator

Our next question comes from the line of TJ Schultz with RBC Capital. Please proceed.

TJ Schultz - RBC Capital

Hi guys. Good morning. Just on WestOK again. I understand you're monitoring producers and offer the rates here, but you said capacity could get out of it quickly if it's needed and I guess you have a plan here. If you could just expand on that what the potential CapEx spend here could be if the market conditions do dictate?

Trey Karlovich

Obviously, we've been on the volume of growth of how much capacity we need but it would be somewhere between $60 million and $110 million.

Gene Dubay

And the reason, this is Gene, we could do it fairly quickly as we have a plant side at (inaudible) where we could add a plant. So we're not -- when we look at adding a plant in WestOK we're not looking at acquiring property. We've got some of the infrastructure we need there already. So that would facilitate getting the plant their quickly if we made that decision.

TJ Schultz - RBC Capital

Okay, great. And then just lastly to clarify maybe on some of the previous M&A questions. I think of reference maybe in Trey’s prepared remarks was that you all are actually seeing more opportunities outside your core areas and I know the follow-up here was that you’re still focused looking at assets additions around existing assets. But if you could just expand generally on what you’re seeing up there in the acquisition market from evaluation perspective as you kind of balance the organic capital spend versus the potential maybe grow through acquisition?

Trey Karlovich

Well, we certainly see the projects with the better return organically as opposed to acquisition. When we talk about acquisitions here is more likely that we would have an acquisition within one there as it close to one of the areas that we operate as opposed to going off in another area for an acquisition.

We’re having Greenfield opportunities come to us that are in the areas beyond those that we currently operate. But we don’t have those signed up today so I hate to speculate what we would have and when that would come about. But again we’ve had a number of questions about growth opportunities and number of acquisitions about balance sheet, however, these opportunities develop we do have an eye on our balance sheet and we’re going to maintain our ratios as we move forward. So, we look at opportunities in that vein what is going to yield to us, our unitholders and how we maintain our balance sheet.

Operator

Our next question comes from the line of Praneeth Satish with Wells Fargo. Please proceed.

Praneeth Satish - Wells Fargo

Hey guys, good morning. Just a couple of quick ones for me. I think Trey you mentioned in your prepared remarks that APL could get to 3 bcf per day of processing volumes. I guess just what timeframe are you looking at before you can get to that level of volumes?

Gene Dubay

As I said in the remarks, we've planned out five, six years out in time. That’s what we see based on producers that we have currently in our core operating areas, their drilling plans, what they provided us, and what their expectations are.

Praneeth Satish - Wells Fargo

Got it. And then on the switch from keep-whole to POP with the SandRidge contract, are you losing any margin on that change or is it kind of net neutral to margin; how should we think about that?

Gene Dubay

There is obliviously a change in the economics when you go with keep-whole and the percent of proceeds contract; there the percent of -- both contracts do have gathering fees associated with them; those gathering fees are similar; the change is really based on what your frac spread is and what your keep is as the processor. Obviously under keep-whole economics, if we were in ethane production, that spread would be quite a bit higher. Since we are in ethane rejection in Western Oklahoma and with where NGL prices are today, that spread is contracted. We are now more -- we have more variability on natural gas price today though.

So as natural gas prices have come down over the past month, that obliviously has more of a detrimental impact, 2% of proceeds and it would under a keep-whole arrangement. So, it’s hard to quantify, I can go back -- we'll obviously be able to go back and look at what that impact would be. But going forward, it's just based on what's your commodity prices are and whether you are producing ethane and those types of things.

So it's -- there is obviously a difference on a per Mcf basis. Today, it is the slight decrease under the POP versus the keep-whole but that could change over time.

Praneeth Satish - Wells Fargo

Got it. And then last question from me for the MBC contracts that you have at South Texas, can you give us a sense of where volumes are running relative to the minimum contracted volumes; I am just trying to gauge the magnitude of true up if of that could occur next year and the first quarter?

Gene Dubay

So, most of the producer haven’t -- started to increase volumes that were short in the first half of the year, our expectation currently is that they will catch up and there would be no true up for the 2014 period.

Praneeth Satish - Wells Fargo

Got it. That’s it from me. Thank you.

Gene Dubay

Thanks.

Operator

Our next question will come from the line of Helen Ryoo with Barclays. Please proceed.

Helen Ryoo - Barclays

Thank you, good morning. Just a couple of quick follow-ups. So in Eagle Ford South Texas, on the MBC, I think you said you were being paid for about 140 million of volume last quarter from the MBC payment, just where are you now in terms of this payment and going forward, how should we think about the MBCs ramping up?

Gene Dubay

Yes Helen. So we are slightly above that number for this quarter. The MBCs, like I just answered for Praneeth’s question, they did catch up some of those volumes. We expect them to continue to catch up through the second half of the year to where that adjustment that we have on our reconciliation will reverse and go to a net -- almost zero if not zero by the end of the year. So we do expect volumes to increase. Obviously we’ve already recognized a portion of that EBITDA. So that will be a slight disconnect going forward for the second half of the year. You could see volumes increasing but you may not see as big of a jump for EBITDA or EBITDA per MCF if you do that type of analysis. So, we do expect to see the volumes catch up; we do expect to see the minimum volume adjustment reverse back to zero as those volumes do catch up, I think this will be recognized those earnings in revenues.

Helen Ryoo - Barclays

Okay. Thanks for the clarification. And then for 2015 guidance, it assumes the full $400 million -- full utilization on your $400 million capacity. Could you remind us where do you stand in terms of contracting, is that all contracted out or is there a little bit more to be done in terms of contracting? If you could provide some numbers around that that would be very helpful.

Trey Karlovich

Let me start and then I'll let Pat follow up a bit. So our 2015 guidance just to be clear, does not assume the plant is full for the year.

Helen Ryoo - Barclays

Right. That's for the year end.

Trey Karlovich

Right. And that -- right. So I just wanted to make sure that was clear.

Helen Ryoo - Barclays

Okay. Yes.

Pat McDonie

And I think as I said earlier, I mean we have obviously with the producers that we have currently under contracts, we expect them to fill the remaining capacity at Silver Oak I and a meaningful portion of the capacity in Silver Oak II and additional contracting with still the remaining volume. And we are again way down the line on discussions with I’m not going to say numerous, but several producers that have very large packages of gas that would give us the confidence that we will fill that capacity by the end of next year.

Helen Ryoo - Barclays

Okay, great. And then just earlier comments on the Permian, West Texas, prospects there to add new plants -- new 200 plants everywhere. How should we think about the dollar investment associated with padding of new plants and also the related infrastructure.

Gene Dubay

So, Helen so when we’re looking at plants in West Texas as you’re seeing the Driver Plant and the Edward Plant and what we’re doing with the Buffalo Plant they’re all 200 million a day plants, very similar in design. Obviously there are some slight differences based on the location and where you locate the plant that could drive a little bit of infrastructure costs hopefully it contains some economies of scale as we continue to add the plants. But I would expect the cost to be generally in line with what we spend on these past two plants.

Helen Ryoo - Barclays

Right. So, I think if the plant cost itself if I remember correctly was about 100, 110 but it probably doesn’t include the related infrastructure spending. So all-in, I am just curious with the gathering and maybe some residual stuff that you have to do is it 200 or 300 a good number to use or you could provide some color there?

Gene Dubay

Generally it’s 200.

Helen Ryoo - Barclays

Okay. That sort of an all-in cost?

Gene Dubay

That’s for the primary infrastructure, discharge lines all the compression to get to gas to the plant. That may not include all of your well connect capital over a period of time, but that’s a general line of item and that’s a gross number. So obviously, to Pioneer we will pay 72.8% of that.

Helen Ryoo - Barclays

And would you say it’s similar if you will to add new plants in the SCOOP area where you just got the 400 or you have the 400,000 acreage dedication, is that also a good number to use as you add plants there?

Gene Dubay

It would be generally the same for the plant. One thing to point out in the SCOOP, we will be adding some gathering infrastructure but we also have some producers that come on a high pressure and deliver directly into us where we’re not spending dollars on the well connect capital. So, for the plant yes, for the infrastructure, it could vary slightly.

Helen Ryoo - Barclays

Okay. And then just in the around the SCOOP area any new plant you add there. Would that you have joint venture with MarkWest?

Gene Dubay

That would totally depend the MarkWest joint venture covers four Counties primarily in the Arkoma portion of Southern Oklahoma.

Pat McDonie

I guess what I would add to that is try to say that depends, but certainly have several different options off of the Arkoma connector line that we're building. So the economics will dictate, but certainly building incremental capacity in Arkoma area gives us a residue gas outlet which we think is going to be much needed. So, we'll see how goes forward, but it could be in our JV or it could be upside of the JV.

Helen Ryoo - Barclays

Okay. Thank you very much.

Gene Dubay

Thank you.

Operator

Our final question will comes from the line of Wayne Cooperman with Cobalt Capital. Please proceed.

Wayne Cooperman - Cobalt Capital

Hi guys. Could you give us anything specific as to how you're going to fill up both of these South Texas plants? I mean you have contracts in hand for 400 by the end of next year or we just supposed to trust that you'll get them done?

Gene Dubay

We don't have contracts in hand and we say today we know exactly when these molecules are going to show up and then there was agreement. We have contracts with some of the most significant producers in this area and we have expect agreements with others. So with the, what I would say with the momentum this taking place we expect in a confidence that we are going to have these plans fold. Now again I can't tell you which molecules are going to come under which agreement but that’s what we expect can happen.

Wayne Cooperman - Cobalt Capital

So we just got to trust you?

Pat McDonie

I think there is more involve than trust, but we again we are pleased with what’s happening down there. We have recognized as we have talked earlier in the call that there has been some, there has been more processing capacity than there has been supply. We see that dynamic improving in our behalf and we also have very much improved our relationship with the producer community on that system. You have seen us operate in every other area where we have operated in every other area we build up the plants that we have built. And our expectation is that this area is going to performance more in line with the other areas that we operate as we move forward.

Wayne Cooperman - Cobalt Capital

Okay, good luck.

Gene Dubay

Thank you.

Operator

This concludes our question-and-answer portion of today’s call. I would like to turn the conference back over to Eugene Dubay, CEO. Please proceed.

Gene Dubay

Yes thank you ladies and gentlemen we very much appreciate your interest here today and we have got a lot of good questions. We are again I reiterate as a management team we are pleased with results we are pleased with the areas we operate and what we have in front of us. So we will keep an eye on the balance sheet as we move forward. And we look forward to working with you. Thank you.

Operator

Thank you for your participation in today’s conference, this concludes your presentation. You may all disconnect. Good day everyone.

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