Atlas Pipeline Holdings (AHD) is an unusual company. The company does not directly own any hard assets or have any operations of any significance. Instead, the company holds ownership interests in Atlas Pipeline Partners (APL). Atlas Pipeline Partners is one of the largest natural gas transporters and processors in the United States. Atlas Pipeline Holdings owns 100% of the general partner of Atlas Pipeline Partners and 5.4 million limited partner units of Atlas Pipeline Partners. The company’s ownership of Atlas Pipeline Partner’s general partner entitles Atlas Pipeline Holdings to incentive distributions, via its ownership of incentive distribution rights (IDRs), which allow Atlas Pipeline Holdings to collect a flexible percent of distributions from Atlas Pipeline Partners depending on the rate that Atlas Pipeline Partner’s increases its distribution to unit holders. Atlas Pipeline Holdings currently is entitled to 50% of all total distributions above $0.60 per quarter per Atlas Pipeline Partners unit. If Atlas Pipeline Partners wants to pay out an additional $10 million to the company's unit holders, it would also have to pay $10 million to Atlas Pipeline Holdings. What this means is that Atlas Pipeline Holding’s distribution increases are levered to distribution increases at Atlas Pipeline Partners, with the leverage being substantial over the long haul.
Because of Atlas Pipeline Holding’s ownership of Atlas Pipeline Partner’s incentive distribution rights along with its holdings of 5.4 million Atlas Pipeline Partners units a $0.10 per unit increase in Atlas Pipeline Partner’s distribution would provide enough additional cash flow to Atlas Pipeline Holdings for Atlas Pipeline Holdings to increase its distribution per unit by $0.16. This occurs as a result of Atlas Pipeline Holding’s lower unit count compared to Atlas Pipeline Partners and Atlas Pipeline Holding’s ownership of Atlas Pipeline Partners units. Since Atlas Pipeline Partner’s current distribution is so much higher than Atlas Pipeline Holding’s this provides Atlas Pipeline Holdings with a growth rate substantially higher than that of Atlas Pipeline Partners.
Several days ago, Atlas Pipeline Partners announced a significant increase in its distribution guidance due to a restructuring of Atlas Pipeline Partner’s hedge book. Atlas Pipeline Partners had previously suggested that it would distribute $1.95 during the second half of 2008 with a coverage ratio of 1.2. Now Atlas Pipeline Partners is guiding for $2.10 for the second half of 2008, allowing the coverage ratio to increase to 1.3.
The following table shows where Atlas Pipeline Partners and Atlas Pipeline Holdings’s distributions should be for the second half of 2008:
| | Current Distribution | Annual Rate Based on Second Half Guidance | Growth Over Current Distribution |
| Atlas Pipeline Partners | 3.76 | 4.20 | 11.7% |
| Atlas Pipeline Holdings | 1.72 | 2.42 | 40.7% |
The previous table does not take into account the growth in Atlas Pipeline Partner’s coverage ratio. Atlas Pipeline Partners cannot increase its distribution without paying equal amounts of cash to Atlas Pipeline Holdings. Any excess distributable cash flow at Atlas Pipeline Partners that is not being distributed should be considered to really be half owned by Atlas Pipeline Holdings. If Atlas Pipeline Partners ran with a 1.0 coverage ratio Atlas Pipeline Partners and Atlas Pipeline Holdings would have the distributions shown in the following table. The following numbers are per unit.
| | Based on Current DCF | Based on Annual DCF Based on Second Half 2008 Guidance |
| Atlas Pipeline Partners | 4.14 | 4.83 |
| Atlas Pipeline Holdings | 2.32 | 3.43 |
Today’s news that Atlas Pipeline Partners is issuing 5 million additional units to finance the hedge book restructuring should be viewed as a great thing for Atlas Pipeline Holdings. These additional units will increase the cash flow to Atlas Pipeline Holdings via their incentive distribution rights and they will further increase Atlas Pipeline Holding’s leverage to Atlas Pipeline Partners going forward. These 5 million additional units should increase Atlas Pipeline Holding’s cash flow and distribution by a further 10% once the issuance is completed.
As if this was not exciting enough, Atlas Pipeline Partners is the pipeline operator with the largest exposure to the Marcellus shale, something I am very bullish on. Atlas Pipeline Partners can probably sustain at least a 5% annual growth rate for years with substantial upside possible depending on how fast the Marcellus is developed. I expect to see Atlas Pipeline Partners sustain a growth rate of at least 7% for several years, which is still well below Atlas Pipeline Partner’s past growth rate.
Additional upside at Atlas Pipeline Partners and Atlas Pipeline Holdings may be seen in the future through further commodity price appreciation and/or additional acquisitions at Atlas Pipeline Partners. Because of the recent commodity price appreciation and modification to Atlas Pipeline Partner’s hedge book Atlas Pipeline Holding’s DCF has likely increased by nearly 50%. As growth at Atlas Pipeline Partners continues I expect growth in Atlas Pipeline Holding’s DCF to continue to be close to 20% annually without any additional benefit from commodity prices or acquisitions at Atlas Pipeline Partners.
The bottom line is that Atlas Pipeline Partners most recent announcement should be viewed in extremely positive light. Atlas Pipeline Holdings and its parent company Atlas America (ATLS), which I have talked about here, should both benefit immensely. The Atlas companies are without a doubt some of the best-run companies in their industry and I believe that this week’s news only reaffirms my bullishness for each of them.
For Further Review
Atlas Pipeline Partner's Press Release
Disclosure: Long ATLS
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