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Atlas Pipeline Partners LP (NYSE:APL)

Barclays CEO Energy/Power Conference Call

September 04, 2012, 04:25 pm ET

Executives

Trey Karlovich - CFO

Analysts

Helen Ryoo - Barclays

Helen Ryoo - Barclays

Good afternoon. I am Helen Ryoo, MLP analyst at Barclays last, but not least our final presenting company for the day is Atlas Pipeline Partners. It's my pleasure to introduce Trey Karlovich, Chief Financial Officer.

Trey Karlovich

Thanks, Helen. Sorry, customary forward-looking statement slide. So, Atlas Pipeline Partners, we're a gathering and processing master limited partnership located in the Permian Basin, the Woodford Shale and the Mississippi Lime areas and the Mid-Continent.

We also own a 20% interest in an NGL line in West Texas, West Texas LPG that's operated by Chevron.

So the story about our pipeline. Atlas Pipeline, like I said, is in three very strong producing areas in the Mid-Continent. We set ourselves up to grow this business through significant internal growth capital that we've invested over the past two years. We're in the middle of a 600 million investment program that we spend about approximately 70% on. We've recently completed a new processing facility on two of our plants, we have a third one that will come up in the first quarter of next year.

As you can see, the growth that we've sustained over the past two years is been significant. Distributable cash flow last year increased 62%, our distribution increased this quarter compared to last quarter was a 19% increase. And we are looking to continue to grow that distribution going into next year.

As I mentioned our new facilities, two of them have come online recently, another will come online in the first quarter. We expect to get incremental EBTIDA from those facilities beginning in the first half of 2013 when we get incremental NGL takeaway. We've had a very strategic and disciplined approach to growing our business.

We’ve had capital discipline, we focused on projects of north of 20% rate of return. Those are internal growth projects. We're also, when we look at external growth projects, we are very strategic in what we're looking at. We’re looking at areas with liquids rich production. We're not looking into dry gas areas. We feel like our focus is on processing NGLs, not just gathering. That being said, we are trying to take advantage of certain opportunities that presents themselves to us. We recently did a acquisition in the Barnett, that is a dry gas area that are strategic in that and we're gathering gas associated with Atlas Resource Partners which is a sister company of ours.

We've been very focused on derisking our business physically and financially. We have a very robust hedge book through 2013 and into 2014 and we're starting to look at 2015 as well. Physically we've also worked on restructuring our contracts so that we have less risk based contracts, primarily [keep whole]. We have lowered our [keep whole] exposure over the past two years and look to continue to do so going forward. We've added fee based contracts on our Velma system as well as the West Texas WTLPG assets.

We continue to look at fee based businesses, contract structures. We also are looking at adding percent of proceed contract, percent of proceeds we feel like aligns us with the producers so that our interest are aligned with theirs. As we grow we look to maintain our balance sheet, we have certain target metrics for leverage, liquidity distribution coverage. We don’t want our leverage to go over four times, that’s industry average in the MLP gathering and processing space.

We want to be better than average from a leverage standpoint. We want to keep our liquidity north of a $100 million and we also want to keep our distribution coverage on a 12-month period over 1.15 times. We feel like that enables us to manage through low commodity price periods like we were seeing currently.

And we are looking to strategically grow our business. Like I mentioned, we are looking at opportunities primarily in liquids rich areas, but we have a robust list of projects associated with our current assets as well. This is a list of what we have looking ahead. As I mentioned we have a new processing facility on each of our plants. We are looking at additional processing capacity on top of that. We feel like we have the capability to add processing at each one of our locations, the key being making sure that we have not only the gas to fill those facilities but the NGL takeaway in the fractionation space going forward.

A quick overview for each of our systems. We have over 9100 miles of pipe, nine processing plants primarily in three areas. Most of these facilities are new, installed in 2005 or later. We do have a couple of legacy plants that we do run, however those plants do get very high efficiencies. During the second quarter, we processed about 680 million a day. Today that number is over 700 million a day. We made 61000 barrels of NGLs and 3500 barrels of condensate.

As you can see our assets are primarily located in Oklahoma and Texas. We reach in to Kansas as well as in Mississippi Lime. Again Mississipi Lime, Permian Basin and the Woodford Shale are primary areas of operation. So why the growth on our assets. As you can see here by production. We have actually been volumes on our system have been outpacing our processing capacity over the past four quarters.

We just recently completed the mechanical completion of a 200 million a day facility in the Mississippi Lime and we are bypassing a 150 million a day on that system today. We feel like we will able to fill up that system much quicker than we had originally anticipated. Our new Velma facility was 60 million a day. It is currently processing 45 million a day. We expect it to be full by the end of the year.

Beginning in first quarter of 2013, we will have an incremental 100 million a day in West Texas that we expect to fill up quickly with anticipated another 100 million coming online in the first quarter of 2014. Our primary producer in that area is Pioneer, they actually expect us to have that plant available by the first quarter of 2013. We feel like we can meet that objective, should the volumes meet that.

Why our producer is focusing in our area, it is the liquids upgrade. This slide is based on $3 in MCF natural gas price and $0.85 per gallon NGL price, which the NGL price is slightly lower than where it is today. As you can see there is a significant uplift in each of our areas. The West Oak system which is in Mississippi Lime is currently about 3 GPM gas. This is for the entire system. Mississippi Lime gas is actually closer to 4 GPM. So there is even a very higher uplift in that area compared to what we are showing on this slide.

Our Velma area is the Woodford Shale. It is also liquids rich area, a lot of oil production in that area as well. So this associated gas $6 per BTU. And then West Texas, again very high on liquids content, primarily in oil play with associated gas and liquids $8.54 at these prices.

So, Velma this is our system in the Woodford Shale. There are currently 13 rigs running at this system. We have about a 145 million a day on this system of the 160 million a day processing capacity.

XTO, Exxon is by far the largest producer in this area; however Range, Chesapeake, Continental amongst some others are in the Velma area and the Woodford Shale and the Caney Woodford.

The new 60 million a day plant that we installed is dedicated to XTO. It is contracted full under a 10 tenure contract, a fee base contract as well. The system is a POP system Percent of Proceeds. So we actually share in the proceeds that we get from the system with the producers on the system. So we feel like we’re very much aligned with them along with the fee based contract with XTO.

As I mentioned the new plant, it’s running about 45 million a day; we’re running north of a 100 million a day on our existing 100 million a day plant.

Western Oklahoma, this is the Mississippi Lime. Sandridge is our largest producer on the system. We also gathering process gas for Chesapeake and Shell, Range, and Devon are other large producers in this area that are within our footprint. We feel like we have the largest infrastructure in this area at this time. Our system covers Alfalfa, Woods, Grant into Harper and Barber Counties in Kansas which are some of the key areas in the Mississippi Lime.

As I mentioned, the gas coming on in the Mississippi Lime right now is closer to 4 GPM. That’s primary in the Alfalfa County area, which is kind of north central part of our facility.

Next week, we’ll start running gas through our new 200 million a day plant at Wenoka. We'll have 458 million a day of capacity and we're moving about 400 million a day gas today. So we expect that system to go up very quickly.

Again this is an area where we are waiting on liquids takeaway, we will be able process and move all the gas that we can in the interim but beginning into the first half of 2013 is when we expect to have incremental liquids takeaway from (inaudible) lime once we have that incremental takeaway we expect to get significant incremental EBITDA on the system as well.

West Texas is in the Permian Basins just outside a Midland, we had two facilities today the [Midkiff] facility which also includes are consolidated plan which is a brand new 150 million a day processing facility. Along with a Benedum plant which is a 45 million a day legacy system processing plant.

We are currently processing about 255 million a day on the system. So we are essentially full. We are currently allocated on liquids at this system as well beginning also in 2013 we will have incremental takeaway from the [DCP Santos] project, we are timing with that incremental NGL takeaway to have a new processing facility in place, if we call it our driver facility, it will be slightly North or our Midkiff plant. It is a new two ultimately 200 million a day processing facility which will take our total capacity in that area to 455 million a day.

Primary producers here are Pioneer, Concho, Loredo, Apache all of our producers here are asking when you will have the next processing facility.

The new horizontal drill in the Permian Basins had been significant. We're expecting the increase in production to follow as I mention Pioneer has asked us to have the driver plant fully ready to go by the end of 2013 that’s something that we believe we can accomplish, we are waiting to see the production come online.

Finally our NGL pipeline that we had a 20% interest in is West Texas LPG; Chevron owns the other 80% and operates this pipeline. This is a fee based NGL pipeline running from West Texas and the Barnett to Belvieu. This system is low cost provider of NGL transportation in this area. We expect this system to remain full; it’s currently running 244,000 barrels per day.

We expect it to maintain or possibly exceed that in the future again it’s a fixed fee system it goes off for our interest about $8 million a year in distributable cash flow.

So financial update, our second quarter results in light of the liquids pricing during the period and in light of fractionation being done during the period we turned in what we thought were very good results for the second quarter.

We had approximately $50 million of EBITDA, about $33 million of distributable cash flow we were able to make our 56 in distribution at slightly over one times covered 1.1 times on a last 12 months. Our target is to put a distribution in place that we can maintain even in at low price environment. We feel like we are our 56 and distribution is maintainable even in the low price environment with our hedge book in place and we look to increase that as opportunities present themselves.

The key for the second quarter was really volumes, volumes that greatly outpaced but we had expected for the period and have continued to do so into the third quarter. I think the volumes have also exceeded the expectations of the producers in our areas. As the producers have come on line with their wells, they are coming on bigger IPs and sustaining those volumes for a longer period of time that has more than offset in our opinion the price impact for the period.

What this graph is attempting to show is that we are not as commodity price sensitive in our distributable cash flow as we were historically. We build this business on volumes and we look to add volumes to be how we sustain this business going forward.

I mentioned earlier few of our financial objectives; we are currently running at 3.4 times leverage at the end of second quarter. Through this capital program we expect to see that leverage tick up slightly to 3.8 may be 4 times and however going forward when we get the incremental EBITDA from having the liquids take away we expect to see that leverage come back down to 3.5 times that is really where our comfort level is about 3.5 times leverage.

We structure our balance sheet to maintain liquidity through this capital spend and we amended our credit facility as the $600 million facility has an important feature for another $200 million and you go to 800 and we are also looking though to maintain our senior secured leverage below 1.5 times.

We feel like keeping a strong balance sheet and strong credit metric enable us to further grow our business going forward. We do hedge, I will get into little bit more details on our hedging though I feel like we have adequate protection through 2013 and into 2014 and we continue to add to that position going forward. I mentioned we have positive credit movement over the past two years we look to continue to that momentum going forward, we are currently rated B plus and S&P and B1 at Moody’s.

Compared to our peer group, we feel like we have a very strong balance sheet like I mentioned 3.4 times levered industry average at the end of the second quarter was 3.9 times our threshold is 4 times so right at the end of industry average we want to be better than that from a leverage stand point. Liquidity, we feel like we have a very strong liquidity position. And we feel like we have adequate access to the market should we need liquidity going forward and our enterprise value is comparable to the average in our industry.

I mentioned earlier that we're looking at de-risking our business. One of our focuses there is to de-risk our contract structure with the producers in our areas. The ExxonXTO is a prime example of this. We took that contract as a fee based contract. It's a committed contract. We're looking to add additional fee-based revenues but also looking primarily at POP contracts.

We feel like as a management team that a POP contract aligns us very well with the producers in our areas and allows us to work with the producers to grow their cash flows and ours as well. A keep-whole contracts while economics are very lucrative are generally contracts in lower GPM areas where the producer is just looking for an outlet for their gas and not necessarily looking for liquids upgrade.

Where our systems are located today, producers are primarily wanting the liquids upgrade associated with their production. So we don’t expect to negotiate many more keep-whole contracts on our existing systems. The keep-whole contract does come with additional risks. You are short in natural gas, you are long in NGLs. We have worked to lower our keep-whole exposure. However our West Oak System does have historical keep-whole contracts and those have been very lucrative.

Looking at the tenure of our contracts, 99% of our contracts are in place in to and through 2014. Some of our most significant contracts include our pioneer agreement at West Texas goes through 2022. Our Chesapeake contract at West Oak can go through 2018. Our XTO contract goes through 2022, our Sandridge contract through 2014. Additionally our liquids takeaway contracts are very important as well. We have 15 year liquids takeaway contracts with DCP beginning at the time at the first time liquids move.

The West Oak contract will go into play in 2013, the West Texas contract will going to play in 2013, the Velma contract will going to play in 2017. Again those are each 15-year contracts. So we have adequate liquid takeaway for 15 years, almost 16 years on West Texas in Western Oklahoma and closer to 20 years at Velma.

Protecting our gross margin is a key to be in MLP. We feel like with our fee business and the way they we are hedging today that we have very good protection to our margin. We're currently 81% protected, that's factoring in 19% from a fee based business and then hedging to hedge our exposure on our equity production under our keep whole and POP contracts.

When we look at hedging, we hedge our entire equity production, not system by system, so we look at our entire book. We are currently long natural gas, long NGLs and long condensates. So we are putting on protection for those long positions. So looking at 2012 2013 and 2014, 78% hedged for 2012. This does not include ethane production. This is [C3] plus natural gas and condensate, 75% in 2013. We feel like we've a very strong hedge book going forward and we continue to add on to that position.

As of the end of the second quarter, this position was a $67 million asset position. While that's great we would rather be in a liability position on our hedge book because we are not hedging a 100% of our production. Looking out into 2014, about 35% in the first quarter, 24% in the second and 20% there forward. We continue to add to those positions even in a low price environment. We feel like layering in the positions allows us to fully protect our book going forward and to add to the tenure of our book.

Over the past two years, APL has been a very strong performing MLP as you look at the total return, a 102% compared to our peer group it’s been a very strong investment. As we've grown this business, we were able to delever our balance sheet and take advantage of some asset sales and reinvest that capital into areas where we see production and drilling rigs increase rather than areas where you are seeing a decrease in those activities.

So the key highlights for our pipeline, we have a diversified asset base. Again we are in the Permian Basin where there has been more activity in Midland than a lot of people can remember. We are in the Mississippi Lime where there is robust drilling activity and in the Woodford Shale which also has strong drilling activity and a commitment from one of the largest, if not the largest company in the world in Exxon Mobil XTO. We have stable long-term contracts and 95% of our process volumes and fixed (inaudible) margins tied to contracts that mature beyond 2014 with large producers that anchor producers really in our areas.

We have a strong balance sheet. We feel like our balance sheet is best in class when compared to other gathering processing MLPs. We feel like our ratings may be not indicate that at this point in time, but we continue to move up that ladder and we continue to focus on moving up that ladder as well. We feel like keeping the leverage under four times, keeping our distribution coverage where it is, maintaining minimal liquidity will allow us to manage through periods of down commodity price exposure, yet also allows the flexibility to look at opportunities within our asset base as well outside our asset base.

And we have a proven management team, our management team averages 23 years of experience between Eugene Dubay, myself and our new COO Pat McDonie. Among others we feel like we have a team that can execute on our projects and continue to grow this business. With that I will open it up for any questions.

Question-and-Answer Session

Unidentified Analyst

Can you give us a sense of what your quarterly, your annual run rate EBITDA would on an unhedged basis at current NGL prices and commodity prices?

Trey Karlovich

On an unhedged basis?

Unidentified Analyst

Right.

Trey Karlovich

It is actually pretty close to what it was in the second quarter. In the second quarter when we disclosed this number, our hedges benefited us to about $2 million. So you are looking at about a $48 million quarterly run rate EBITDA. Now that was based on second quarter pricing. Pricing has actually come up slightly. So we would expect that number to be closer to $50 million plus, volumes have ramped up significantly as well.

Unidentified Analyst

Pricing is up from the end of the second quarter, from the average of the second quarter?

Trey Karlovich

Average of the second quarter and from the end of second quarter. Our second quarter average was about $0.80 per barrel per gallon NGLs. That was partly due because we sold a portion of our West Texas barrels at a discount in order to not store those barrels. During may ONEOK's fractionater down for a month. All of our barrels went into storage rather than leave those barrels in storage and take them out over time, we decided to liquidate those barrels during June. So those were factored into our second quarter average price.

Unidentified Analyst

And given that NGL pricing collapsed during the second quarter or during the first and second quarter, why weren’t your hedges more benefited because you put them on so long ago that they were just below some money for a long-time and now they’re basically breakeven?

Trey Karlovich

Partly, but the main reason is because our hedge book during the second quarter was made up of a significant number of put options that we purchased. Those put options while they settled within the money, we also recognized the premium associated with those puts during the period. Going forward and a copy of our hedge book is actually at the end of this slide and you’re not going to be able to read it from there, but if you want to pull it up on mind, it will be a little easier a lot of our positions going forward and especially in 2013, our swaps that we feel like may have a stronger impact should commodities stay in this area.

Unidentified Analyst

Thank you.

Unidentified Analyst

Maybe if I can push out, let’s say, here, and I will give you certain assumptions to work with. Your expansion plans that you discussed come on stream, on time and on budget. The future’s curves for the commodities that are tradeable or accurate and with their forecasting over next, say, 12 months, real GDP is 2%. Where do you think your distribution can be as a range, looking at a year?

Trey Karlovich

So, we haven't given distribution guidance. We have given some guidance on EBITDA for 2013, $250 million plus, maintaining coverage of over 1.15 times, you would have an increase in distribution and we believe it would be meaningful. Given those assumption, I am not going to give you a number but I would say that we can hit high put, which is 60, 75 at the end of next year.

Unidentified Analyst

Just a follow-upon on the guidance you’ve given. You said it’s greater than $250 million of EBITDA and what are the commodity price assumptions underlying that?

Trey Karlovich

That was based on commodity price assumptions in February of this year. The range was $250 million to $300 million correct $250 million to $300 million that based on about $1.2 NGLs and $2.90 natural gas. So pretty close to where we are today.

Again some flexibility there. Some of the reasons for the range there is we don't know the timing of NGL takeaway as a key in growth in our EBITDA because while we can move the gas, we will get some incremental fee revenue for gathering the gas. We can't process and that’s why we really get the upgrade on our margin.

Unidentified Analyst

And can you just talk a little bit more about what are you waiting on pipe takeaway capacity?

Trey Karlovich

Yes, the takeaway capacity is really reliant right now DCP completing Southern Hills and (inaudible) Lime. Our expectation is that those will be done in the second quarter of next year. We have not heard any reason that otherwise. However, that does have a pretty significant impact on us from a run rate EIBTDA standpoint.

Unidentified Analyst

Okay. And we're you said guidance was based on about $1.2 NGL, where are they now I know you talking about blend between Conway.

Trey Karlovich

That's the weighted average, that’s our weighted average between Conway and Belvieu. Right now its about $0.90, $0.92 today.

Unidentified Analyst

And you think at around $0.90 you would still fall on that 250 to 300 range?

Trey Karlovich

Yeah, if DCP was there on time.

Unidentified Analyst

And what’s the timing assumption Q2?

Trey Karlovich

Q2, yes.

Unidentified Analyst

And how you looking at you capital structure, are you looking to term out some of your revolver if we put the (inaudible) interior liquidity does that work into your distribution coverage assumptions?

Trey Karlovich

Yes, so under our current capital program, we are not anticipating happen to issue any equity to complete this program. We have recently put in a dribble program and at the money program up to a $150 million to finance future growth capital projects, so those projects going forward as we continue to do projects some of which have been announced some of which have not been announced example being we acquire small gathering system in the Barnett Shale. We have also done some compression in some other projects on our systems that have not been material enough to announce. However, are keeping up with the volume plans.

We want to make sure that we maintain the balance sheet strength going forward. As you can see our liquidity we are using our revolver to fund this capital program once we start getting closer to having the cash flow from those assets we will look at ways to permanently finance those. This tranche of assets will probably finance with [debt], incremental projects will have a balance between debt and equity again focused on maintaining leverage, maintaining our distribution, our distribution coverage etcetera.

Trey Karlovich

Okay. Any other questions? Well thank you all for your interest in Atlas Pipeline we greatly appreciate it.

Unidentified Company Speaker

We are doing a breakout in Liberty Five. If you want to join us in Liberty Five for breakout after this. Thank you.

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