Atlas Pipeline Holdings CEO Discusses Q4 2010 Results - Earnings Call Transcript

Feb.25.11 | About: Atlas Energy (ATLS)

Atlas Pipeline Holdings, L.P. (AHD) Q4 2010 Earnings Call February 22, 2010 9:00 AM ET

Executives

Matthew Skelly – VP, IR

Gene Dubay – President and CEO

Glenn Powell – COO

Eric Kalamaras – CFO

Analysts

Steve Maresca – Morgan Stanley

Sharon Lui – Wells Fargo

James Spicer – Wells Fargo

Brandon Osten – Venator

Kelly Krenger – Bank of America/Merrill Lynch

Yves Siegel – Credit Suisse

Operator

Good day, ladies and gentlemen, and welcome to the 2010 fourth quarter Atlas Pipeline Partners earnings conference call. I’ll be your operator for today. At this time, all participants are in listen-only mode. Later we will facilitate a question-and-answer session.

(Operator Instructions)

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

Matthew Skelly

Good morning and thank you for joining us today for the fourth quarter and full-year 2010 earnings call. Before our management team provides comments on our results, I would 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, forward-looking statements often address our expected future business and financial performance, and financial condition 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 1.

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 obligation to publicly update our forward-looking statements or to publicly release the results of any revisions to forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Lastly, management’s discussion this morning includes references to items as adjusted EBITDA and distributable cash flow, which represent non-GAAP measures. A reconciliation of these non-GAAP measures is provided in the financial tables of our quarterly earnings release 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 Dubay

Thank you, Matt. Ladies and gentlemen, thank you for your presence and your interest in Atlas Pipeline Partners.

Today, the company is poised to produce very meaningful results in the coming year. We announced on Friday of last week that we had closed on the sale of our interest in Laurel Mountain partnership to Chevron for $403 million. We will in the near term further reduce our leverage to maximize distributable cash flow leaving the company with less than one times debt to EBITDA. In the intermediate term, we see that we have some great developmental projects that we will be in position to fund with the liquidity that we now have.

We are fortunate to operate three systems that have such developmental opportunities in oil plays such as the Spraberry-Wolfberry, Trenton, Texas, as well as the liquid rich plays of Oklahoma.

In this past quarter, we continued to see very positive growth and development in the areas that we operate. Our plants in The Chaney Dell system are full; we are operating close to our capacity at Velma; and we expect that our West Texas plants will be at capacity when the winter weather abates and the heater treaters come offline in the spring or shortly thereafter in the early summer. We are in position to expand the net capacity in each of our operating areas in the very near term. That expansion of capacity is needed in each of the areas as a result of the drilling activity taking place around our assets.

Glenn Powell, our Chief Operating Officer, will speak to you shortly about each of the operating areas, the volume improvement that we are seeing and the developments that are occurring in those areas.

Our financial results reflect the buildup of volumes across our systems. In addition, we have reduced the commodity exposure in our contract mix and we continue to add hedges at appropriate price levels to ensure the stability of our distributable cash flow.

Eric Kalamaras, our Chief Financial Officer, will describe our hedge positions and enumerate our financial results for the quarter.

For the management team, this has been a journey. For a year we struggled to remain complaint with our debt obligations and maintain liquidity. In this past year, our second year, we focused on maximizing the throughput across our system and rationalizing our asset base. We achieved our goals, which were to improve our balance sheet, reduce leverage, maximize return on our assets, and reinstate the distribution.

Now our challenge is to utilize our liquidity and balance sheet to grow the business in a manner that maximizes the return for our unit holders. In order to accomplish this, we must maintain our fiscal discipline. We need to be proactive and energetic in our business development activities and remain focused in our field operations. We need to remember that our producer customers are the key to our success.

I believe that we can accomplish our goals and we are committed to enhancing the value of your investment.

Now, I would like Glenn Powell, our Chief Operating Officer to update you on our field operations. Glenn?

Glenn Powell

Thank you, Gene. We completed 2010 with an average increase in our gathered volumes across all of our systems of about 13.7% compared to the fourth quarter of 2009. For the fourth quarter of 2010, we transported approximately 656 million cubic feet of natural gas per day and produced approximately 52,000 barrels per day of NGLs. Additionally, we recovered approximately 2300 barrels per day of condensate. Eighty new wells were connected into our Mid-Continent gathering systems during the quarter, a 60% increase over the prior year and only a 4% decrease from the prior quarter.

At our Chaney Dell system, we gathered approximately 244 million per day in the fourth quarter, an 8% increase over the prior period. NGL production was 14,204 barrels per day, which was 23% higher than the prior quarter. A portion of this increased production was a result of operating the Waynoka Plant in ethane rejection for 42 days in the third quarter due to low ethane processing economics. There were no commodity price-driven ethane rejection events during the fourth quarter.

Condensate production was 735 barrels per day. For the quarter, the total liquids production was approximately 2.57 gallons per Mcf gathered on this system. A total of 31 new wells were connected to the system during the fourth quarter, which was flat from the third quarter of 2010, and there are now 24 dedicated rigs working behind the system.

Throughout the fourth quarter, we have continued to experience strong volume growth, associated with the drilling programs at SandRidge, Woolsey, and the other producers. We have continued to operate the processing plant to add capacity, and have been offloading production to third parties for processing while we continue to develop the best growth strategy for adding processing capacity for our producers and for our system.

On the Midkiff/Benedum system, the gathered volumes leveled off to 184 million per day, 18% higher than the prior year and a 2% decrease from the prior quarter. The leveling off in volumes is due to the colder ambient temperatures in the fourth quarter. As an oil play, each oil well site is heated using the wellhead gas throughout the winter. Therefore, the colder the ambient temperature, the more wellhead gas is burnt in the producer’s heater treaters. The slight decrease in volumes on the system comes after dramatic increases as a result of the strong drilling programs by the anchor producers on our system.

NGL production was down 5% from the prior quarter to 27,110 barrels per day. A portion of the decrease in the NGL production is due to the reduction in the wellhead volumes. However, during a portion of the fourth quarter of 2010, we faced a curtailment on the NGLs as a result of exceeding the contracted fractionation capacity, which resulted in rejecting a portion of the ethane production in the residue gas stream.

Condensate production decreased 41% from the third quarter to 1100 barrels per day. The seasonal reduction in condensate volumes is primarily due to lower ambient temperatures. In comparing the fourth quarter of 2009, condensate production was up approximately 40% from the 788 barrels per day recovered during that time period. For the quarter, the total liquids production was approximately 6.42 gallons per wellhead Mcf. The Midkiff/Benedum system also completed a total of 37 new well connection in the fourth quarter and there are now approximately 70 rigs working behind this system.

As evidenced by the 18% increase in gathered volumes over the fourth quarter of 2010, we continue to benefit from strong producer drilling interest in the vicinity of our system. We believe there is a significant potential that the continued increase in gathered volumes will result in utilizing all the available processing capacity on our system during 2011. We have begun preliminary discussions to restart our Midkiff plant in 2011, which will increase the processing capacity from 195 million per day to 255 million per day.

Within our Velma system, we gathered approximately 94 million per day, a 4% increase over the third quarter. We recovered 10,608 barrels per day of NGLs, which is a quarterly increase of 4%. Our condensate production was up 17% from the prior quarter at 431 barrels per day. Combined condensate and NGL production was approximately 4.91 gallons per gathered Mcf during the fourth quarter. From a commercial standpoint, there were 12 wells connected to the system during the quarter and there are currently two dedicated rigs working behind the system.

As we near the nameplate capacity of 100 million cubic feet per day for the Velma processing plant, we are working with the producers on the best plan to grow and expand the system to meet their needs.

The Laurel Mountain and Tennessee gathering systems gathered a throughput of 133 million per day.

In summary, in the fourth quarter, we continued to realize healthy increases in the volumes gathered across our systems. We expect to continue to grow the volumes as producers increase their drilling programs in our operating areas. There is substantial producer interest in drilling in oil rich areas such as those surrounding our Velma and Midkiff/Benedum gathering systems, and we continue to see great drilling results at our Chaney Dell gathering system. These volumes position Atlas for excellent growth projects in the near feature.

And that concludes my remarks and I’ll turn the call over to Eric.

Eric Kalamaras

Thanks, Glenn. Thank you for joining us on the call this morning. As Gene mentioned, it continues to be an exciting time at Atlas as we continue to make significant progress in executing our strategy.

In the past year, Atlas Pipeline has become one of, if not the most, financially flexible MLPs and this financial flexibility gives us the opportunity to take advantage of numerous organic projects as well as allows us to pursue strategic opportunities that can materially increase cash flow and create additional value for our unit holders.

February 17, we closed on the sale of Laurel Mountain for $403 million and have added to an already impressive balance sheet. As of today, we have nearly $690 million of liquidity with net leverage near one times, and net debt to total capital approximately 10%, the lowest in the industry.

With this balance sheet, the partnership is in strong position to be aggressive, yet prudent in creating additional growth opportunities within our existing operating areas, but also to take advantage of strategic opportunities where we can diversify our asset base elsewhere. That said, we are focused on immediate cash flow accretion and intend to exercise our (inaudible) on the 8.125 [ph], 2015 senior unsecured notes, and extend the necessary tender offers to bond holders of the 8.75% 2018 notes pursuant to the terms of the indentures. We intend to make the notices imminently and expect to be completed within 30 days of giving such notices.

After year-end, we’ve also begun paying down $70 million on new $350 million revolving credit facility. Assuming we call all 2015 notes and this revolver debt pay down, the net effect of retiring this debt will reduce annual interest expense by another $24 million, thereby increasing distributable cash flow in excess of $0.45 per unit annually. This allows us to increase DCF to limited the partners by 24% versus the fourth quarter’s annual run rate. And please note, this fourth quarter was at a distribution coverage level of 1.3 times, meaningfully higher than most of our peers.

Further, this growth in DCF is imminent, and is not taking into account the opportunities that can be created from having superior balance sheet flexibility. We intend to aggressively pursue additional growth strategies from increasing producer activity within our core operating areas from strategic transactions.

For the fourth quarter, partnership reported distributable cash flow of $0.47 per unit or $1.88 annually, with adjusted EBITDA of $43 million. This compares to $44 million reported in the fourth quarter of 2009. However, in 2009, we had full quarter of our Elk City system, which contributed nearly $10 million to that EBITDA. On our pro forma comparison, we actually had significant year-over-year EBITDA growth of 23%, largely resulting from materially higher volume growth as well as better pricing.

To arrive at adjusted EBITDA, we exclude non-recurring items such as gains from asset sales as well as non-cash and other one-time items. We believe adjusted EBITDA is the best way to evaluate ongoing operating cash flow. In the press release, we reconciled the non-GAAP measures, including distributable cash flow and adjusted EBITDA. Fourth quarter distributable cash flow was approximately $25 million versus $9 million compared to the same period last year. The large increase was driven by accelerating volume growth, more favorable pricing, and a tremendous reduction in our interest expense. Based on the $682 million sale of Elk City alone, we have reduced interest expense over $15 million per quarter or $60 million annually. We looked at more accretion to DCF to further reduction in interest expense. Coupled with significant organic volume increases, through a growing backlog of projects, all this bodes very well for increasing distributions and cash flow.

On January 25, 2011, the partnership declared a distribution for the fourth quarter of 2010 of $0.37 per common limited partner unit holders of record on February 7 to eventually be paid on February 14. This distribution had distributable cash flow coverage of 1.3 times, and was a 6% increase from the third quarter 2010 distribution.

Regarding NGL prices for the quarter, we continue to experience the benefit of increased pricing as both heavy and light ends remained robust, not only from seasonal demand increases of propane and butane, but also from incremental demand. Despite the sharp recent upticks in pricing, US ethane prices are still quite competitive relative to foreign sources, as both demand as well as supplies remain tight. For the quarter, our average NGL crude related chip was 54%, and is nearing its historical average. Our realized weighted average NGL price compared to last year’s quarter increased 10% to $1.08 a gallon.

As a reminder in our press release, we have provided our unhedged realized prices at our systems. We have also included our composite NGL mix for both Mont Belvieu and Conway hubs.

Regarding risk management, we have taken advantage of the significant increase in pricing over the past several weeks and further enhanced our already solid positions in crude oil, propane and ethane. As of February 21, we are approximately 73% hedged for 2011 and have approximately 10% of propane hedged for the second and third quarters of 2012. We are committing to adding protection to our business and doing so in economically attractive terms. You can expect us to continue to extend the duration of our risk management book in the near future.

As a reminder, our risk management strategy is to hedge up to 80% of our NGLs during the prompt year and up to 50% in the following year. We’ll do this by using product-specific options and swaps and only using crude oil to protect the heavy end of the NGL stream and condensate.

In our press release, we have included a summary of our existing hedge positions for 2011 through 2012.

Moving on to expenses, we continue to make tremendous progress in reducing costs. For the quarter, cash G&A was $9.8 million, down nearly 15% from the same period last year. Operating expenses for the quarter totaled $12.5 million, which was consistent with the guidance I indicated last quarter that we would expect operating expenses to be around $13 million a quarter for the foreseeable future. Interest expense totaled $13 million versus $28 million last year, a reduction of over 50%. This is a direct result of the Elk City transaction and the $682 million reduction in debt. Now with the sale of Laurel Mountain, unit holders will continue to receive the additional benefit of lower interest expense as previously indicated.

Discussing interest expense is a good segue into our capital structure. In late December we successfully syndicated and amended $350 million credit facility that matures in 2015. This new facility contains a variety of features, including an accordion provision of up to an additional $100 million available to the partnership at its discretion.

This replaces our previous $380 million facility with – in current pricing is LIBOR plus 250 basis points. So on a swapped basis, it’s nearly 3%. On December 31, we had approximately $70 million drawn in this new revolver, but we intend to reduce those borrowings which will leave us with the full $350 million available.

In our press release, we illustrate the liquidity and debt impact of paying down our revolver as well as illustrate the net debt positions on the balance sheet.

Pro forma for the sale, the partnership will have approximately $344 million in cash with total liquidity of $690 million. This will leave Atlas Pipeline with net leverage of approximately one times and net-debt-to capital of approximately 10%. Our capital cost continued to be reduced and our credit ratings have been upgraded, most recently, by S&P to B.

During the quarter, we invested $10 million in growth capital, and spent another $4 million in maintenance capital. Majority of our capital spending was driven by increased producer activity for well connections especially in the Midkiff/Benedum system and related to continual development of the Spraberry and Wolfberry trends, as well as our Chaney Dell system where produce activity has increased and our expansion into Kansas is online. We spent approximately $15 million on this expansion into southern Kansas during 2010. We expect to see increased volume growth through 2011 with potential projects being more additive through 2012.

For 2011, the Board has approved capital budget of approximately $100 million with $84 million allocated to growth capital and $16 million to maintenance capital. We expect the bulk of this capital to be allocated to well connects, pipelines and compression (inaudible) with the remainder allocated to processing and other capital needs.

In conclusion, we’re optimistic about the future of Atlas Pipeline and continue to capitalize on opportunities to utilize our strong balance sheet and to significantly grow cash flow for our unit holders.

With that operator, would you please open it up for questions?

Question-and-Answer Session

Operator

(Operator Instructions) Our firs question comes from the line of Steve Maresca with Morgan Stanley. Please proceed.

Stephen Maresca – Morgan Stanley

My first question is on, if you can discuss a little bit more the trends in the Permian. I think Glenn you had mentioned on the Midkiff situation where you rejected some ethane. I thought you said due to the lack of fractionation capacity. What is the availability in the region for frac capacity for NGL production and what are the opportunities there?

Glenn Powell

Excellent question. Thankfully at our Midkiff and Benedum systems we have competition. And so, several of those parties as they continue to see the activity behind our systems, and also the systems of some of our competitors, continue to increase. There are options. There are options not only for frac capacity but also highpoint takeaway capacity. We have just amended our agreement with ONEOK to increase the capacity for the rest of this year and we’re talking about additional expansions for several years after that. So we won’t run into what we ran into at the end of 2010 from a barrel standpoint in 2011. And then for 2012, we’re actually working on that right now with the producers and also with several parties that are interested in taking our barrels away.

Steve Maresca – Morgan Stanley

Okay. Gene had talked about and you did as well, Glenn, I mean, most of the systems running at or near capacity. When you are talking about the organic potential, and you had the $84 million growth this year, I guess, what can we expect from a timing on customer commitments, what are you seeing from the producer community on Velma or Midkiff? And how much bigger do you think the opportunity set is other than that $84 million that you have announced for 2011?

Glenn Powell

I kind of covered with each system. As you look at our – I’ll start with West Texas, when you look at West Texas, when we put in our consolidator plant a little over a year ago, and added 30 million to 40 million a day, we left the old Midkiff plant, which was made up of three specific trains, actually in the yard. And so for not a whole lot of capital, we can take one of the trains, the largest part of that old 100 million a day plant, and put it back into service within a few months. And so we have already dusted that plant off. We’re already moving down the path, obviously with Pioneer and the position that they are in with Concho with 70 rigs behind the system, we feel like that we’ll be able to take care of the growth on the system.

We’re expecting probably sometime into the second quarter or first part of the third quarter, of potentially needing to put that 60 million a day train back in service. That’s why we went to ONEOK at the end of last year to make sure that we could get our barrels to market.

Moving on to our system in Western Oklahoma system, the Chaney Dell system, what we have done is currently we have been able to offload some of the growth in volumes as we continued to work on several different options to be able to get our barrels to market based on the drilling behind the system. We’re working with the producers on expansion projects. We’re also looking at – there are several plants around our system that are not fully utilized. So that’s why we’ve entered into offloading agreements until we can finalize our plans with the producers. But I expect that we’ll be able to let the market know based on our discussions with the producers very shortly.

Then moving on to our Velma system, as we continue to move towards filling up the capacity in that particular plant, we continue to work with the producers behind the system because we continue to see a lot of activity. We’ve entered into one offloading agreement. We’ve got another two that we’re in discussions with those parties as well. And we should be moving, I mean we are moving quickly and hopefully we will able to announce something shortly.

Steve Maresca – Morgan Stanley

Okay, I guess final question. Eric, you talked about the coverage in the quarter being pretty strong at 1.3 times and above peers. I mean does that indicate that you would be comfortable going down a little bit from there as you talked – the accretion comes on line from the growth projects and then also from this interest expense going down? Do you guys feel comfortable at a lower coverage ratio?

Eric Kalamaras

It’s a great question. I think you can expect the coverage ratio to come down a little bit. We are being conservative, no doubt, but we’ve also been in the stage where we continue to restructure the balance sheet. And I think once we finally look into that process, we’ll be positioned to move the coverage down to perhaps more competitive levels.

Operator

Our next question comes from the line of Sharon Lui with Wells Fargo.

Sharon Lui – Wells Fargo

Just wondering if you’re still targeting that $0.45 to $0.50 distribution, let’s say, I guess 1.15 to 1.2 coverage ratio for next quarter.

Gene Dubay

Hi, Sharon. The answer is, yes, we haven’t made any change to that guidance. I think certainly we have contemplated in giving that guidance, the transactions that we have described this morning certainly as it relates to the balance sheet. I think what you would find is that we’ll be very comfortable within that guidance and we’ll look at that in the coming quarter.

Sharon Lui – Wells Fargo

Okay. I guess in terms of the guidance for AHD, that hasn’t changed either? Is that correct?

Gene Dubay

I’m going to defer on AHD.

Sharon Lui – Wells Fargo

Okay. And then just to clarify in terms of, I guess the retirement of the senior notes, are you planning to retire the entire balance of the 2015?

Gene Dubay

The process of that will effectively be simultaneous offers to all of that holders pursuant to the indenture – ultimately liking to call the 2015. So, I would leave it at that. We’ll have some information out shortly as to exactly how we intend to go through that process, but until we do that, I’d prefer to just leave it at the comments that I’ve already made.

Operator

Our next question comes from the line of James Spicer with Wells Fargo.

James Spicer – Wells Fargo

Just a couple of questions. What are the tax implications from the Laurel Mountain sale for unit holders, if any?

Eric Kalamaras

James, we haven’t given exact tax information, and the reason is because each individual’s tax position is different and vary from the next. What I can tell you is related to Laurel Mountain, given the distribution guidance that we’ve indicated and given the distributions that we’ve already paid effectively what the unit holder will see is a – there’s no effective tax cash loss, if that’s the ultimate part of your question that you’re getting at.

James Spicer – Wells Fargo

Just a follow-up to Sharon’s question on the pro forma capital structure, you mentioned in addition to calling the 8.125% notes potentially tendering for the 8.75% notes and given the pro forma cash is around $315 million, I guess this would imply that you would be looking at just tendering for a portion of those 8.75% as opposed to the full amount of those notes?

Eric Kalamaras

James, again, we will make the offers pursuant to the indenture and with the ultimately goal of calling the 2015’s 8.125%. So, to your point, I understand how it appears on the balance sheet, but that being said, we will make the necessary offers to all the bondholders.

James Spicer – Wells Fargo

Lastly, is your long-term leverage target still in that three to four times range?

Eric Kalamaras

It is. I think that over the long run, we ideally would like to be at the slight end of that range, close to the three times as opposed to the four times. But that is a very competitive position for the balance sheet and is effectively where we ultimately would like be, and I think you can expect us to be there.

Operator

Our next question comes from the line of Brandon Osten with Venator. Please proceed.

Brandon Osten – Venator

Hi guys, congratulations on a hell of a year of creating shareholder and bondholder value. I wanted to just dive in here, so the property, plant and equipment at post sales, so that remains at $1.3 billion is that correct?

Eric Kalamaras

Yes.

Brandon Osten – Venator

Okay. And then on the bond side story, I know you guys aren’t giving out a lot of information, but is it going to be a partial redemption or is it going to be a total redemption?

Eric Kalamaras

We will be up to the pursuant of the terms of the indentures at the end of the day. But again, the goal would be to call the 2015’s.

Brandon Osten – Venator

The goal is to call as much as you can.

Eric Kalamaras

Of the 2015’s.

Brandon Osten – Venator

Okay, okay. And then going forward, you guys talked about leveraging your balance sheet. Are you guys looking to leverage it primarily through acquisitions or primarily through new projects that you guys are going to build out internally?

Gene Dubay

This is Gene Dubay. Certainly, we talked about the new projects. We are going to work on the projects that we have organic to us and we’re alert and pursuing other opportunities that make sense. You can’t forecast exactly how that’s going to go. We’re much more comfortable forecasting how the developmental projects will go in the areas we operate, but we are looking for growth in our core competency.

Brandon Osten – Venator

Okay, so you guys have said that your target – and I can’t remember. I think this is after dropping the interest expense off, but your target is distributable cash flow, say was it $2 a year roughly or is that the plan?

Eric Kalamaras

Yeah, we had indicated $0.45 to $0.50 by the third quarter of 2011. So, that would get you to your $2 a year.

Brandon Osten – Venator

So, given your strong balance sheet, coupled with your – I’m not sure, what your targeted internal rate of return for projects are, but to the extent that you guys are willing to basically do some expansion programs through your really efficient balance sheet, what would be the targeted – over three or four years, assuming you were able to deploy capital in a way that made sense given your own internal target, how far would you guys or to what level would you guys hope to take that distributable cash flow over three to four years if you were to hit what you guys view as your target capital structure.

Gene Dubay

This is Gene Dubay. I don’t think we want to put a goal out there. I think we want to avail ourselves of the opportunities that exist, and I think we want to be fairly aggressive in doing that, but we also want to be disciplined and to try to come up with a number I think I just don’t want to do that on a call like this. As we achieve things, we will let you know as quickly as we can.

Brandon Osten – Venator

Right. Okay. Maybe I’ll put this in a different way. If I make an assumption in terms of where you want your balance sheet to be, what kind of internal rate of return do you guys target on new projects?

Eric Kalamaras

We think we can achieve, in most cases if not all, in excess of 20%.

Operator

Our next question comes from the line of Kelly Krenger with Bank of America/Merrill Lynch. Please proceed.

Kelly Krenger – Bank of America/Merrill Lynch

Most of mine have been asked and answered and I’ll just ask one clarifying point on the balance sheet. Eric, you had mentioned that you’ll call the 8.125% pursuant to the terms of the indenture, and then I just want to make sure that I also heard you, I think at least in one other instance, mention something about some form of tender offer related to the 8.75% also pursuant to the terms of the indenture. I know you don’t want to say too much more but did I hear that correctly?

Eric Kalamaras

Kelly, you did.

Operator

Our next question comes from the line of Yves Siegel with Credit Suisse. Please proceed.

Yves Siegel – Credit Suisse

Just a couple of follow-up questions. One, when you offload the volumes, what kind of arrangements are they, do you keep control of those volumes or does the producer just go to a third party?

Gene Dubay

No, we keep control of those, and they’re basically fee arrangements where the third party will actually process for us.

Yves Siegel – Credit Suisse

And then the second question, have you delineated how you’re going to spend to $84 million of growth capital?

Gene Dubay

Yes, at a high level. I mean, it’s basically a third for well connects and a third for plant, and about another third for compression.

Yves Siegel – Credit Suisse

So, the Midkiff, how expensive is it to bring that train back on line, and is that in the budget?

Gene Dubay

Yes it is, but it’s not that expensive, it’s around $15 million.

Yves Siegel – Credit Suisse

And when you think about bringing that train back in line, what kind of processing, how efficient is that facility, and when you think about it, well, let me just leave it there, how efficient is that train when it comes back on line, relative to what you build? Yes.

Gene Dubay

So when it comes back on line, it will be better than it was before, but with our existing facilities out there, we have what we believe to be the most competitive, and the most efficient processing plant. And it even really gets to the point of how much capital you want to put into this 60 million a day train as to how efficient you want it to be, and that’s just something that we’re talking about with our partner, Pioneer, just how much capital do we want to put in.

Operator

(Operator Instructions) Our next question is a follow-up. It comes from the line of Sharon Lui with Wells Fargo. Please proceed.

Sharon Lui – Wells Fargo

Just wondering if you could comment on what you’re seeing in the acquisition market, and also maybe potential timing of when you can, I guess secure commitments for a larger Velma project?

Glenn Powell

As Gene mentioned earlier, we are obviously in the marketplace, and obviously we don’t want to telegraph where we are in the marketplace, but we are seeing a lot of potential, both around our system and certainly in our general area. I don’t think we want to really televise at this point where we are in the process. But we feel very optimistic about what we’re seeing, how it makes sense for APL as it specifically gets to a Velma project much like our Chaney Dell facility. We just continue to work with the producers on the best way to be able to grow those facilities for them, and we are making great progress and we’re certainly not there and hopefully these things will come to fruition.

Operator

Ladies and gentlemen, this concludes the Q&A portion of the call. I would now like to turn the presentation back over to Mr. Dubay for closing remarks.

Gene Dubay

Thank you. Again, we very much appreciate your interest in the company and we as management will endeavor to meet or exceed your expectations in our management of Atlas Pipeline Partners. Thank you very much.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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