Atlas Pipeline Partners LP (APL) is making progress on several expansion projects but continues to exceed processing capacities and offload production to third-party plants, the Atlas Energy Inc. affiliate said Tuesday.

APL said an increase in its gross margin from operations — $71.2 million in 3Q2011 compared with $50.3 million in 3Q2010 — was primarily due to increased natural gas liquids (NGL) prices and volumes on its WestOK, WestTX and Velma systems.

Earlier this year APL increased its capital budget to respond to significant growth of its Midcontinent midstream processing businesses (see Daily GPI, May 16). Added to the capital spending plan for 2011 and 2012 was $400 million to pay for expansion of the Western Oklahoma (WestOK Chaney Dell) and Velma systems, for expenses for compression, gathering lines and connections that are expected to be incurred in 2012, and to restart the cryogenic skid at Midkiff in West Texas.

In 3Q2011 the WestOK system had average natural gas processed volume of 263.7 MMcf/d, a 24.6% increase compared with 3Q2010, and NGL production of 13,392 b/d, a 15.8% increase from the year-ago period. Those increases were related to APL’s expansion into Kansas, which was completed in June 2010, and increased producer activity in Oklahoma and Kansas, particularly in the Mississippian formations.

“The WestOK system is currently operating in excess of capacity with certain volumes being offloaded to third parties for processing or bypassing the processing facilities,” according to APL, which said it expects volumes to continue to increase as volumes from producers in Oklahoma and Kansas continue to add to the system via development in the oil-rich Mississippian Limestone formation. An expansion of the gathering system, which would result in total processing capacity of 428 MMcf/d — an 88% increase — is expected to be completed in mid-2012.

The WestTX system’s 3Q2011 average natural gas processed volume was 198.1 MMcf/d compared with 171.0 MMcf/d in 3Q2010. The increase reflected the addition of incremental liquids takeaway capacity and the successful restart of 60 MMcf/d of capacity from the Midkiff plant, the company said. At the same time, WestTX NGL production was 27,387 b/d, which was down 4.1% compared with 3Q2010.

“We had some downstream pipeline issues as well as pipeline issues with our facility,” COO Glenn Powell said during a conference call with analysts Tuesday. “Nothing major, just short interruptions — three to five days — that impacted us. And then obviously the heat impacted us as well…it’s definitely resolved itself already.”

APL reported 104.9 MMcf/d on the Velma system in 3Q2011, a 24.5% increase compared with 3Q2010, due primarily to production added on the Madill to Velma gathering system associated with activity in the liquids-rich portion of the Woodford Shale. Average NGL production increased to 12,198 b/d, up 19.2% compared with 10,231 b/d in 3Q2010.

In late August APL signed agreements with DCP NGL Services LLC (DCP), a subsidiary of DCP Midstream LLC, to sell its NGL production from each of APL’s processing facilities in Oklahoma and Texas (see Daily GPI, Aug. 30). The agreements provided long-term support for the expansions at WestTX, WestOK and Velma systems and allow for the sale of additional NGLs from the West Texas plants on an interim basis.

APL reported adjusted earnings before interest, income taxes, depreciation and amortization of $49.7 million for 3Q2011, a 2.6% increase compared with $48.4 million in 3Q2010.

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