Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

PAA Natural Gas Storage, L.P. (NYSE:PNG)

Q4 2012 Earnings Call

February 7, 2013 11:00 AM ET

Executives

Roy Lamoreaux – Director, IR

Greg Armstrong – Chairman and CEO

Harry Pefanis – Vice Chairman

Dean Liollio – President

Al Swanson – EVP and CFO

Analysts

Darren Horowitz – Raymond James

Steve Sherowski – Goldman Sachs

Brian Zarahn – Barclays Capital

Brian Zarahn – Baird Equity Research

Ross Payne – Wells Fargo

Becca Followill – U.S. Capital Advisors

Connie Hsu – Morningstar

John Edwards – Credit Suisse

Michael Blum – Wells Fargo

Ethan Bellamy – Baird Equity Research

Mark Reichman – Simmons & Company

Dennis Coleman – Bank of America Merrill Lynch

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the PAA and PNG Fourth Quarter and Full Year 2012 Results. At this time, everyone is in a listen-only mode. Later, we’ll have a question and answer session, and the instructions will be given at that time.

If you need assistance during the call, press star, and then zero. As a reminder, this conference is being recorded. I’d now like to turn the conference over to our host, Director, Investor Relations, Mr. Roy Lamoreaux. Please go ahead, sir.

Roy Lamoreaux

Thank you. Good morning. Welcome to our fourth quarter full year 2012 results conference call. The slide presentation for today’s call is available under the conference call tab of the investor relations section of our website at paalp.com, and pnglp.com

I would mention that throughout the call, we’ll refer to the companies by their New York stock exchange ticker symbols of PAA and PNG respectively.

As a reminder, Plains All American owns the 2% general partner interest and all the incentive distribution rights and approximately 62% of the limited partner interest in PNG, which accordingly is consolidated into PAA’s results.

In addition to reviewing recent results, we’ll provide forward-looking comments on the Partnership’s outlook for the future. In order to avail ourselves of the Safe Harbor precepts that encourage companies to provide this type of information, we direct you to the risks and warnings set forth in the Partnership’s most recent and future filings with the Securities and Exchange Commission.

Today’s presentation will also include references to certain non-GAAP financial measures such as EBITDA. The non-GAAP Reconciliation section of our websites reconcile certain non-GAAP financial measures to the most directly comparable GAAP financial measures and provide a table of selected items that impact comparability to the Partnership’s reported financial information. References to adjusted financial metrics exclude the impact of these selected items.

Also for PAA, all references to net income are references to net income attributable to Plains.

Today’s call will be chaired by Greg L. Armstrong, Chairman and CEO of PAA and PNG. Also participating in the call are; Harry Pefanis, President and COO of PAA; Dean Liollio, President of PNG; and Al Swanson, Executive Vice President and Chief Financial Officer of PAA and PNG.

In addition to these gentlemen and myself, we have several other members of our management team present and available for the question-and-answer session.

With that, I’ll turn the call over to Greg.

Greg Armstrong

Thanks, Roy. Good morning, and welcome to everyone. Let me start of today’s call by briefly recapping PAA’s full quarter and full year financial results. Yesterday, after market closed, PAA reported fourth quarter adjusted EBITDA of 609 million which marked a very strong finish to a record setting year.

These results exceeded the midpoint of our guidance by $89 million or 17% and we’re 64 million above the high end of our guidance.

In comparison to last year’s fourth quarter, adjusted EBITDA, adjusted net income and adjusted net income per diluted unit increased by 29%, 33% and 23% respectively.

With regard to annual performance during 2012, we delivered year-over-year increases of 32%, 38% and 28% of adjusted EBITDA, adjusted net income and adjusted net income per diluted unit respectively.

Highlights of PAA’s fourth quarter and full year performance for 2012 are reflected on slide three.

2012 was a record year of performance for PAA in which we achieved or exceeded each of the goal we set at the beginning of the year. A recap of our performance versus goals is set forth on slide four.

In addition to delivering results above midpoint guidance in each quarter of the year, we closed and substantially integrated the BP Canadian NGL acquisition which was under contract at the end of 2011.

We also initiated and closed an additional 650 million of complementary acquisitions and completed our 2012 organic growth capital program materially on time and on budget.

Furthermore, we raised distributions in 2012 by just over 9% through November which was in line with the high end of our 2012 target range of 8% to 9% while generating distribution coverage of 160%.

In January, we declared an increase in our annualized distribution to be paid next week, to $2.25 per common unit, which equates to 9.8% year-over-year increase over the distribution payable as February.

As a result of continued strong results, our extended visibility for organic growth, recent acquisitions, and very solid distribution coverage, we recently increased the range of our target distribution growth for 2013 from 7% to 8%, to that level of 9% to 10%.

As shown on slide five, PAA increased its distribution in each of the last 14 quarters and in 33 out of the last 35 quarters, delivering compound annual distribution growth of approximately 7.7% over the past 12 years.

Yesterday evening, we furnished financial and operating guidance for the first quarter in full year of 2013.

As a result of the acquisitions, it closed in the fourth quarter, and ongoing refinements to our forecast, we increased the midpoint of our full year 2013 adjusted EBITDA guidance by 100 million, relative to the preliminary guidance provided in November.

As reflected on slide six, this guidance includes a 15% year-over-year increase and adjusted segment profit performance from our fee-based segments.

Coming off a year in which market conditions were extremely favorable for our supply and logistics segment, our guidance for this segment assumes a return to baseline type market conditions after the first quarter of 2013, as infrastructure expansions are expected to address bottleneck situations in a couple of regions.

This assumption results in an approximate $260 million year-over-year reduction in our supply and logistic segment relative to last year. And total 2013 EBITDA guidance for PAA of 2.025 billion which is approximately 82 million less than our 2012 results.

I would point out that should marketing conditions remain favorable beyond the first quarter of 2013, there is an upper bias to our guidance.

I would also note that base on the midpoint of both our financial guidance for 2013, and our 9% to 10% targeted distribution growth for 2013, we expect distribution coverage to remain very robust at around 125%.

During the remainder of today’s call, we will discuss the specifics of PAA segment performance relative to guidance, our expansion capital program, recent acquisitions and integration activities.

Our financial position and the major drivers and assumptions supporting PAA’s financial and operating guidance. We will also address similar information for PNG.

At the end of the call, I will provide a brief overview of our rail activities and discuss our goals for 2013, as well as our outlook for the future.

With that, I’ll turn the call over to Harry.

Harry Pefanis

Thanks, Greg. During my section of the call, I’ll review our fourth quarter operating results compared to the midpoint of our guidance, the operational assumptions used to generate our 2013 guidance, and our 2013 capital program, as well as our recent acquisition activities.

So as shown on slide seven, adjusted segment profit for the transportation segment was $198 million which was $5 million above the midpoint of our guidance.

Volumes of 3.66 million barrels per day were slightly ahead of guidance per unit basis adjusted segment profit was $0.59 per barrel. Segment profit benefited from higher volumes, partially offset by expenses related to repairs and remediation cost for a release we experienced earlier this year.

Adjusted segment profit for the facility segment was $141 million, approximately $8 million above midpoint of our guidance.

Volumes of $130 million barrels per month were in line with guidance, and adjusted segment profit per barrel of $0.42 exceeded the midpoint guidance by $0.03 per barrel.

The quarter benefited from the contribution from the rail asset acquired from US Development Corp in December and higher than forecasted profitability from our Canadian NGL facilities, partially offset by higher expenses related to settlement, and other miscellaneous items.

Adjusted segment profit from the supply and logistics segment was $267 million or $74 million above the midpoint of our guidance for the fourth quarter.

Volumes were in line with guidance at approximately 1.1 million barrels per day, and adjusted profit per barrel was $2.61, or $0.69 above midpoint of our guidance.

Financial over performance for the quarter was driven by stronger butane margins resulting from various refinery outages, and water basis differentials, particularly between midland and Cushing, but also between the LS market and WTI and several of the Canadian crude grade relative to WTI.

Let me now move on to slide eight and review the operational assumptions used to generate our full year 2013 guidance.

Our guidance includes the benefit of recently completed $500 million USD rail terminal acquisition and $125 million acquisition of Chesapeake’s crude oil gathering assets in the Eagle Ford.

Our transportation segment, we expect volumes to average approximately 3.7 million barrels per day which is a 6.5% increase over 2012 volumes.

We expect adjusted segment profit per barrel of $0.61 and approximately 5% increase over 2012.

The volume increases include increases of approximately 105,000 barrels per day from a premium basin pipeline, and 90,000 barrels per day from our Eagle Ford assets, plus a full year contribution from the BP NGL pipelines, partially offset by plant asset on the second quarter.

Average tariff rates are also expected to increase by approximately 6.5% over last year’s levels. For our facilities segment, we expect an average capacity of 123 million barrels of oil per month, an increase of 17 million barrels per month over 2012 volumes.

The increase is primarily due to a combination of new projects placed into service throughout the year, the acquisition of the USG rail assets, and the full year impact of the BP NGL assets.

I would not that we’ve added a line item in our facility segment guidance for cash for volumes handled by our crude oil rail terminals. Adjusted segment profit is expected to be $0.41 per barrel in 2013.

For our supply and logistic segment, we expect volumes to average approximately 1.1 million barrels per day, compared to 1 million barrels per day in 2012.

The increase is due to anticipated increases in our lease gathering activities as we expect domestic production to continue to increase.

Adjusted segment profit per barrel is expected to be $1.49, which is $0.84 lower and the $2.33 generated in 2012.

We expect differences to moderate after the first quarter of 2013 when additional pipeline infrastructure is expected to be placed in service.

However, as Greg mentioned, should differentials be more favorable and expected, there would be upside to our guidance.

Let’s not move on to our capital program. During 2012, we invested approximately $1.2 billion in organic growth projects which is in line with the guidance range provided last quarter.

As reflected on slide nine, our expansion capital expenditures for 2013, are expected to total approximately $1.1 billion. And as is typical with our capital program, this is comprised, primarily the number of small to medium size projects.

The expected in service timing of the larger projects in our capital program is included on slide 10. I’ll provide a status update for a few of our larger investments now.

I’ll start with our Mississippi line pipeline. The segment from our Garber [ph] stationed Cushing is expected to be in service in May of 2013, and the segment from Byron [ph] to Cushing, is expected to be in service by July of 2013.

Now in South Texas, we really expected some of our assets to be service in December of 2012, however, the in service states have slipped into 2013. Following assets are expected to be in service by March 1, 2013.

Eagle Ford joint venture pipeline from Gardendale to Three Rivers in Corpus Christi, the north eastern lateral of our Gardendale gathering system, and our stabilizer at Gardendale.

Our Corpus Christi dock is expected to be in service by June 1, 2013, and both the extension of our joint venture line to the enterprise pipeline at Lesie [ph], and the completion of the western lateral, our Gardendale gathering system are expected to be in service in August of 2013.

A map of our Eagle Ford area assets is reflected on slide 11. In the Gulf Coast area, we have pipeline project to connect our Mississippi-Alabama pipeline system to the Gulf Coast refiner, this is a $95 million project supported by a shipper commitment. And the line is expected to be in service in the fourth quarter of 2013.

In Canada, we remain on track to bring our Rainbow II pipeline into service by June 1, 2013. The pipeline will transport [inaudible] from Edmonton to our Nipisi terminal to meet the increasing demand from heavy oil producers in that area.

The Rockies, we expect to invest approximately $90 million for our 36% share of the cost to expand the [inaudible] pipeline and that pipeline is operated by the same group. Our terminal at St. James, we begun construction up our 1.1 million barrel phase five expansion. We’re also improving the connectivity to our rail facilities and loading capacity, dock. We expect this construction will be completed at the end of 2013.

We also have several rail projects in process, or progress, I’m sorry, including the expansion of our loading capacity in Manitou, and our Van Hook facilities in the Bakken area and our Carr facility in Alberta [ph].

Our DJ base and loading terminal at Tampa Colorado is expected to be in service by the fourth quarter of 2013 and expansion of our Yorktown Virginia unloading facility is expected to be in service in July of 2013.

We’re also developing a rail unloading terminal in the Bakersfield area that have contract pipeline infrastructure there. And we anticipate that being in service in the first half of 2014.

Shifting to maintenance capital, our maintenance capital expenditures for the fourth quarter of $48 million, resulting in 2012 total expenditures of $170 million.

We expect this capital expenditures for 2013 to be in the range of $160 million and $180 million.

On the acquisition front, during 2012, we completed approximately $2.3 billion of acquisitions. The vast majority of this total relates to the BP Canadian NGL assets, the USD rail terminals and Chesapeake’s Eagle Ford gathering system.

We continue to be very active in evaluation potential opportunities, but for competitive reasons, and due to confidentiality restrictions, we’re unable to discuss and of the specifics with respect to future activities. With that, I’ll now turn the call over to Dean to discuss PNG’s operating and financial results.

Dean Liollio

Thanks, Harry. In my part of the call, I will review PNG’s fourth quarter and full year operating and financial results, review PNG’s performance relative to our 2012 goals, provide an update on PNG’s first quarter and full year 2013 guidance, and cover our 2013 goals.

Let me begin by discussing PNG’s fourth quarter and full year 2012 results released last night. The highlights of which are reflected on slide 12.

PNG reported fourth quarter adjusted EBITDA, adjusted net income, and adjusted net income per diluted unit of $35.2 million, $23.2 million and $0.31 respectively.

In comparison to our 2011 fourth quarter results, adjusted EBITDA increased approximately 5% and adjusted net income and adjusted net income per diluted unit were the same as prior period results.

For the full year 2012, PNG reported adjusted EBITDA, adjusted net income, and adjusted net income per diluted unit of $122.4 million, $77.2 million, and $1.04 respectively.

Full year adjusted EBITDA results were $1.4 million above the midpoint of our November guidance.

In comparison to our 2011 full year results, adjusted EBITDA, adjusted net income, and adjusted net income per diluted unit increased 14%, 13% and 7% respectively.

As reflected on slide 13, these results mark the 10th consecutive quarter that PNG has delivered results in line with, or above guidance.

With respect to distributions, in January, we announced a quarterly distribution of $1.43 per unit on an annualized basis. This distribution which is payable next week, is equal to the distribution that was paid in November 2012.

For the full year 2012, PNG increased distributions paid to limited partners by approximately 2.7% over 2011.

Our distribution coverage for the fourth quarter and full year of 2012, we approximately 124% and 108% respectively.

PNG continues to be financially well positioned. Included on slide 14, is a condense capitalization table. As of December 31, 2012, PNG’s long term debt to capital ratio was 29%, the long term debt to adjusted EBITDA ratio was 3.9 times, and PNG had $168 million of committed liquidity.

Looking back on last year, and as detailed on slide 15, we delivered solid results relative to our first two goals for the year, mainly delivering financial results above guidance, and completing our organic growth projects on time and on budget.

Regarding our organic growth projects, we brought over 17 BCF of incremental working gas storage capacity into service at Pine Prairie [ph] and Southern Pines. Overall, we exited 2012 with aggregate capacity of approximately 93 BCF, a 22% increase over the 76 BCF we had entering into 2012.

With respect to the third goal, this is to selectively pursue accretive acquisitions, we evaluated a number of opportunities throughout the year, but none met our criteria.

I would note that we remain active in pursuit of potential acquisition and business development opportunities that provide a strategic complement to our business.

Overall, we are pleased with PNG’s 2012 financial performance during a period of continued challenging market conditions, and I want to thank the entire PNG team for their contributions to these results.

Prior to discussing our 2013 guidance, I would like to note, that there has been little movement in the gas storage market since our last conference call with continued narrow seasonal spreads. These historical and current values are reflected on slide 16.

As shown on slide 17, as we enter the 2013 storage season, I look forward to 2014 and 2051, PNG has leased approximately 95% of its available capacity for the 2013 season, and approximately 80% and 50% respectively for the 2014 and 2015 seasons.

These figures include two from storage agreements that totaled 20 BCF at Pine Prairie [ph] and which a subsidiary of PAA will hold the capacity.

Both agreements with PAA are market based agreements with the first in BCF contract having a two-year term commencing March 31, 2013 and the other 10 BCF contract having a three-year term starting on the same day.

From PNG’s perspective, these agreements allow PNG to maintain a higher percentage of contractive capacity while avoiding the earnings volatility and working capital cost that would have come along with managing a larger percentage of its capacity on a merchant basis.

From PAA’s perspective, we’ll be able to utilize its lower cost working capital to manage the capacity, and we’ll have the opportunity to realize any option value inherent in the lease storage capacity. We view this as a win-win transaction that has attractive elements for both PNG and PAA.

Let me now turn to our 2013 guidance. Our first quarter and full year guidance is reflected on slide 18. PNG’s adjusted EBITDA guidance range for the full year 2013 is $117 million to $123 million with a midpoint of $120 million.

On balance, incremental revenues from our recent and planned low cost capacity additions, are expected to largely offset the impact of higher price contract explorations on existing capacity.

Based on achievement on the midpoint of our 2013 EBITDA guidance, coverage of our current distribution level should approximate 103%.

Additionally, our 2013 capital program cost for approximately $42 million of organic growth capital investment.

This capital primarily relates to continued capacity expansion via incremental leeching [ph] of existing caverns at Pine Prairie [ph] and Southern Pines.

2013 goals are straightforward. Number one, deliver operating and financial results in line with or above guidance, two, successfully execute our organic growth program, and three, continue to selectively pursue potential acquisitions and business development opportunities, that provide a strategic complement to our business.

Although we continue to face challenging market conditions, we are executing our strategy well in the current environment. I believe we are positioned to generate upside our forecast if market conditions improve, or volatility increases.

We appreciate your continued investment and support of PNG, and look forward to updating you on our progress throughout the year.

With that, I’ll turn it over to Al.

Al Swanson

Thanks, Dean. During my portion of the call, I will review our financing activities, capitalization, liquidity, and distribution coverage, as well as our guidance for the first quarter, and full year of 2013.

As reflected on slide 19, in December, we raised $750 million through the sale of $400 million of 10 year senior note, and 350 million of 30 year senior notes, with interest rates of 2.85% and 4.3% respectively.

We also raised $167 million including our general partners proportionate capital contribution during the fourth quarter throughout continuous equity offering program by issuing 3.6 million common units.

This brings a total equity raise through the continuous equity offering program for 2012 to $524 million including our general partners capital contribution.

Additionally, we have retained cash flow and raised equity and debt capital in advance of investing it in our organic or acquisition capital programs.

We have applied a portion of the excess proceeds to reduce our inventory related borrowing. Accordingly, we have prefunded the equity component of our 2013 capital program with room to expand the program or complete moderate size acquisitions without needing to raise more equity.

We have also raised sufficient capital to enable us to repay our $250 million, 5.65% senior notes that mature in December of 2013 using short term borrowings from our credit facilities.

As a result, given our ongoing access to the continuous equity offering program, absence of significant acquisition activities, we do not anticipate, we will need to execute over night, or marketed equity offering in 2013.

Before moving on to our balance sheet, liquidity and credit metrics, I wanted to briefly touch on PAA’s financial growth strategy as summarized on slide 20.

Slides 21 and 22 provide additional detail regarding our consistent and disciplined execution of this strategy which we believe has served us well. A key component of our strategy includes targeting high BBB equivalent credit rating, and our financial growth strategy has been designed to target this higher credit rating.

We were pleased that we received upgrade from the rating agencies during 2012 to BBB, and BAA2 which is currently the highest rating level for any MLP.

We are hopeful that the rating agencies will expand the MLP eligible ratings to include BBB+, BAA1 rating level.

We believe our size, scale, diversification, and performance through various cycles, as well as our strong credit metrics and discipline, adherence to our financial growth strategy, should make us a candidate for the BBB+, BAA1 class of MLP.

Moving on to our balance sheet, liquidity and credit metrics as illustrated on slide 23, PAA ended 2012 with strong capitalization and credit metrics that are favorable to our target, and approximately, 2.4 billion of committed liquidity.

December 31st PAA’s long term debt to capitalization ratio was 47%, our total debt capitalization ratio was 51%. Our adjusted EBITDA interest coverage ratio was 8.2 times, and our long term debt to adjusted EBITDA ratio was 3.1 times.

I would also note that slide 24 summarizes relevant information regarding our short term debt, hedged inventory in line as of yearend.

As we have discussed previously, we target minimum distribution coverage of at least 105% to 110% on base line distributable cash flow or DCF.

When our business outperforms baseline expectations, we can generate meaningfully higher distribution coverage. Our practice has been to retain excess DCF to fund our growth.

As reflected on slide 25, PAA has consistently delivered solid distribution growth and coverage throughout a variety of industry conditions. And in 2012, our coverage totaled 160%.

Based on the midpoint of our guidance for DCF and distributions to be paid throughout the year, our coverage for 2013 is forecast to average approximately 125%, and we will retain approximately 285 million of excess DCF or equity capital.

This is our least expensive source of capital, and given PAA’s historically strong performance in our supply and logistics segment, it is also a meaningful source of capital that enables us to convert market related over performance into enduring fee-based cash flow streams.

Moving on to PAA’s guidance for the first quarter and full year of 2013, as summarized on slide 26, we are forecasting midpoint adjusted EBITDA for the first quarter of 2013, of $615 million, and 2.025 billion for all of 2013.

Although our 2013 guidance reflects an approximate 4% decrease in adjusted EBITDA relative to last year, a very important take away point is that our fee-based transportation and facility segments are forecast to grow, 15% in 2013, primarily reflecting the benefit of capital investments made in 2011, and 2012.

I would also point out that the 1.1 billion we expect to invest in 2013 is also focused on our fee-based segments and that the majority of the cash flow benefit from these investments will not be realized until 2014 and beyond.

We believe the accumulative effect of these capital investments provides us with good visibility for continued multi-year growth in baseline adjusted EBITDA.

The slight year-over-year decrease in our adjusted EBITDA for 2013 is associated with a 30% decrease in our supply and logistic segment as our guidance assumes a return to baseline type market conditions after the first quarter.

There are a number of infrastructure projects that are projected to be placed in service around the second quarter of 2013.

As a result, we have adopted a baseline outlook for the last nine months of 2013 as it pertains to market opportunities for this segment. As in prior years, there is an upward advice to our guidance if market conditions for the supply and logistics segment remain favorable beyond the first quarter.

We also wanted to share two other observations about our guidance for 2013. The first relates to seasonality that is primarily associate with our NGL business conducted in our supply and logistic segment.

Our NGL volumes and margins are typically highest in the first and fourth quarters of each year.

The forecast for this seasonal impact to our supply and logistic segment adjusted profit, is illustrated by the yellow bars in slide 27.

The second observation relates to the quarter-over-quarter results that we expect to generate during 2013.

As illustrated on slide 27, throughout 2013, we expect our fee based transportation and facility segments to generate favorable comparisons relative to the corresponding quarters of 2012.

However, due to the exceptionally strong results delivered in 2012, our guidance assumption that favorable market conditions benefiting the supply and logistic segment will not extend beyond the first quarter, our baseline forecast results negative quarter over quarter comparisons for the last three quarters of 2013 relative to the corresponding quarters of 2012.

Before turning the call over to Greg, I wanted to mention that our fourth quarter depreciation and amortization expense was approximately 40 million higher than the midpoint of our guidance, primarily due to year end through [ph] ups, and adjustments on the carrying cost of certain asset including the expected asset sale that Harry mentioned earlier.

With that, I’ll turn the call over to Greg.

Greg Armstrong

Thanks, Al. Rail related activity, specially with respect to crude oil, has been attracting a fair amount of attention both from the industry press and financial analyst reports.

And we have recently increased our investment rail assets in relation to our entire business platform, our rail related activity represented relatively modest component of our adjusted EBITDA.

However, these activity serve a very important purpose with respect to balancing disconnection in regional supply and demand volumes and qualities, and bridging the gaps and pipeline access to the east, and west coast.

With that in mind, I wanted to take just a few minutes to summarize the strategic rationale for expanding PAA’s rail activities into crude oil transport over the last few years, as well as our competitive positioning.

I intend to be brief, and we’ll hit just the top of the way with comments, but we have included some slides in today’s presentation to expand on that comments, and there’s an even more detailed presentation available on our website.

The recent and forecasted renaissance in US crude oil production is having a profound effect on the transportation routes and modes by which end markets are supplied.

Crude oil flows are changing, new infrastructure is being constructed, and the historical pricing relationships for various qualities and geographic locations of crude oil are in place.

As a result, both producers and refiners are actively seeking to optimize their profitability during a dynamic and evolving period in the industry.

At PAA, we believe that rail, particularly when coupled with the scale and scope of PAA’s existing asset footprint and business model, provides our customers with the optionality they seek to take advantage of premium markets in the case of producers, and attractively priced feed stocks in the case of refiners.

As shown on slide 28, PAA has been directly involved in rail related transportation of energy related products for over 11 years beginning with our interest into the NGL business with the acquisition of [inaudible] in 2011.

In 2010, we begin expanding our rail transportation activities to include crude oil by working closely with USD to construct a rail unloading facility at our St. James terminal through our facility segment, and also commencing commercial operations for crude oil rail movements for our supply and logistics segment.

Over the last three years, we have taken additional steps to construct or require multiple rail, multiple additional rail loading and unloading facilities including the acquisition of USD’s crude oil rail assets in late 2012.

As shown on slide 29 and 30, we currently have an extensive crude oil rail network with loading facilities of servers, the three most active US shale and resource place, and unloading facilities that currently service markets on the east and Gulf Coast.

We are also in the process of developing an additional unloading facility that will enable us to service markets on the West Coast.

Our current combined crude oil loading and unloading capacity is 140,000 barrels, excuse me, 140,000 barrels each for loading and unloading capacity, and we have expansion projects under way that will increase our daily loading capacity by 70%, and more than double our daily unloading capabilities.

We believe that PAA’s combined crude oil and NGL rail network which is shown on slide 31, is one of the largest, if not the largest networks in North America, and offers our customers tremendous optionality to transport products and access markets.

There will undoubtedly be periods and regions where demand for rail related transportation services will subside as new pipeline infrastructure is constructed, and differentials and end markets change.

As a result, over time, rail activity will taper off, but we believe that rail will continue and play a role in balancing the market over the long term.

As detailed more fully on slides 32 and 33, given the potential for an extended period of dynamic and volatile market conditions, we believe the combination of scale, scope and flexibility of PAA’s rail capabilities, our extensive network of crude oil and NGL pipelines, terminals, trucks, and barges, and our proven business model, provide PAA with a competitive advantage over other rail participants with smaller scale, and limited scope.

As Harry indicated, we have expanded our reporting metrics to incorporate additional information of our rail activities, and we look forward to updating you on our results in this area in future calls.

Rail is just one component of PAA’s story and our positive outlook. As we look forward across all of our business platforms and activities, we believe that PAA is very well positioned to continue to deliver solid operating and financial performance for the next several years and beyond.

As represented on slide 34, we expect continued increases in North American crude oil production, with much of this activity occurring in specific shale and resource place throughout the US and Canada where PAA has a significant asset presence.

As a result, we expect to enjoy continued strong demand for our services that will not only increase or maintain the utilization of our existing assets, but also provide multiple opportunities to expand and extend our asset base on attractive economic terms.

These fundamentally sound conditions are our primary driver for our multi-billion dollar projects for portfolio supporting our strong visibility for distribution growth.

With this outlook in mind, let me now review our 2013 goals which are highlighted on slide 35. Specifically during 2013, we intend to deliver operating and financial performance in line with, or above guidance, successfully execute our 2013 capital program, and set the stage for continued growth in 2014 and beyond, increase our November of 2013 annualized distribution level by approximately 9% to 10% over our November 2012 distribution level. And finally, selectively pursue strategic and accretive acquisitions.

We do look forward to updating you on our progress towards these goals throughout the year.

Prior to opening the call up for questions, I also want to mention that we will be holding a joint PAA and PNG 2013 analyst meeting on May 30th in New York.

If you have not received an invitation, but would like to attend, please contact our investor relations team at 713-646-4489.

Once again, thank you for participating in today’s call, and for your investment in PAA and PNG, and the trust that you placed into us. We look forward to updating our activities in May. And operator, we are now ready to open the call up for questions.

Question-and-Answer Session

Operator

Thank you. And ladies and gentlemen, if you’d like to ask a question, press star, then one on your touch tone phone, you’ll hear a tone indicating you’ve been placed into queue and you can withdraw your question by pressing the pound key.

If you’re using a speaker phone, please pick up the handset before pressing the numbers.

Once again, if you have a question, please press star, then one at this time. And one moment for our first question.

Our first question is from the line of Darren Horowitz with Raymond James. Please go ahead.

Darren Horowitz – Raymond James

Good morning, guys.

Greg Armstrong

Good morning, Darren.

Darren Horowitz – Raymond James

Greg, a couple of questions. The first one, kind of leverages off of what you were discussing with regard to slide 34. When you look at the amount of lower 48 production growth for crude oil, specifically in the Eagle Ford, and let’s just say, by that 2016 to 2018 timeframe, you get up to wherever that is, 1.6 or 1.8 million barrels a day, how much of an influence do you think that ultimately has, not just on the Gulf Coast refinery network, but more importantly on what seems to be a rather looming significant disconnect in Louisiana light sweet, I mean it would occur to us that you might have effectively a double discount in the Gulf Coast where you see significant dislocations with Louisiana light relative to brand.

Greg Armstrong

Darren, I think it’s fair to say that there’s going to be a lot of cross currents that are going to challenge conventional relationships for the next several years. And again, part of that is going to be sheer volume metric and balances, and some of it is going to be over concentration of light sweet crude in particular areas. And I think that’s kind of what you’re referencing to.

There are a number of alternatives that will become available overtime, and they’ll evolve, I think for example, what we see in the next 12 months may differ from what we see 12 months beyond that point, or 12 months into the future.

And so I think logistics is going to be a critical part of that. Rail, I think is going to be the pressure released valve [ph] in the short term. Longer term, there’s issues with respect to Jones Act Relief and potentially, either exporting crude or exporting slightly refined crude products when you have kind of take splitters, et cetera.

So I think the important thing from our perspective, we’re really prepared for it to go any way it wants to, and we’ll be a participant, but I don’t think there’s any one solution that will come about, and certainly none of us are very good at prediction what Washington DC may or may not do however logical or illogical it appears.

Darren Horowitz – Raymond James

I appreciate the color. My final question is more on this discussion around condensate [ph] production. Certainly with the growth coming out of the Eagle Ford and other areas, obviously, you’ve got a lot of say, moving north on cap line, and I recognize the demand drivers and underpin their [inaudible] two line expansion, but as you guys look forward, do you think there’s going to be enough Canadian demand to keep pace with the expected condensate production growth?

And when does it get to a point where it might just make more sense for you all to think about constructing a condensate, splitter in Louisiana, possibly near St. James, and start thinking about exporting [inaudible]. From our perspective, it seems that it would certainly allow you guys to become even more vertically integrated and give you a lot of bank for your buck leveraging your existing transportation and facilities footprint, right?

Harry Pefanis

Hey Darren, this is Harry. Let me just sort of have it. There are a lot of things driving the market. A lot of times, splitters, obviously, one alternative, change is certainly location, where we could have a condensate splitter. There are also some refineries that are tweaking or have permits in place applied to be able to run more lighter crudes too. And you’ll see some of the pet chem, trying some of the condensates as well.

So I think it goes back, a lot of what Greg said earlier, there’s going to be a lot of twists and turns over the next couple of years, and just trying to position ourselves to be able to participate, whether it’s moving up to Canada, going to refineries, going offshore. Greg, chime if you want to.

Darren Horowitz – Raymond James

Maybe build a splitter in St. James?

Greg Armstrong

I don’t think we’re prepared to comment on that. I will say this, Darren then markets are pretty resilient, and if the discounts for condensate gets wide enough, the demand for condensate in Canada is going to go up. And they’ll turn around and equalize.

So I think there’s clearly, there’s no static forecast anywhere. And there’s going to be cross currents for example if the Eagle Ford continues to climb at extremely high rates of production, I think it could have an impact because of the differentials on how much crude could be economically drilled in the Bakken.

And so either it’s that type of cross currents going on. So all I can say is, we tried to position ourselves, but no matter what happens, we win, in some cases, we win big.

Darren Horowitz – Raymond James

Yes. I appreciate it, Greg. Thanks.

Operator

And we have a question from the line of Steve Sherowski with Goldman Sachs. Please go ahead.

Steve Sherowski – Goldman Sachs

Hi, good morning. You mentioned in the supply and logistic segment that are returned to more base line market conditions is likely to follow the first quarter of this year due to the new infrastructure coming on line.

I was just wondering, are you looking at any corridor in particular, or I guess asking another way, is there any particular corridor where that’s driving the majority of margin growth in the segment?

Greg Armstrong

Well certainly, we’re seeing some significant activity and opportunities to use our assets and our business model in west Texas where we see differentials widen our quite a bit, there’s a number of pipeline projects that are supposed to come in the full service or partial service around the 1st of April.

I will say that we have a history of kind of under promise and over performing. So it’s likely some of those projects could hit a road block or speed bump, and if they delay, then there’s going to be benefit to our business model that we’re not currently reflecting.

I would also point out that the other area where you have activities going on is in the Rockies, clearly the increased rail capacity and the increased ability to unload that capacity has relieve some of differentials up there, and we expect some of those proportionately to come on and the traffic to pick up.

And then also, I would just say in the Eagle Ford, over the next 12 months, but in the near term, there’s just quite a bit of pipeline capacity coming on. So they play the biggest three areas where the big three shale plays right now are south Texas, west Texas, and the Bakken, so kind of yes to your question, all three of those areas.

Steve Sherowski – Goldman Sachs

Okay, understood. Thanks. And just a quick follow up question, in your transportation segment, for the first quarter guidance, it looks like the bottom end of the range is a little bit lower than the first quarter of last year’s results. I was just wondering what scenario would drive that?

Greg Armstrong

You got me lost here. Harry, are you going to bail me out?

Harry Pefanis

I think it was probably NGO related. We have a pretty strong first quarter in the NGO segment.

Steve Sherowski – Goldman Sachs

Okay. Primarily NGO related.

Greg Armstrong

Yes. We’ll verify that, but I think that was the case.

Steve Sherowski – Goldman Sachs

Okay. All right. That’s it for me. Thank you.

Greg Armstrong

Thank you.

Operator

And we have a question from the line of Brian Zarahn with Barclays Capital. Please go ahead.

Brian Zarahn – Barclays Capital

Good morning.

Greg Armstrong

Good morning, Brian.

Brian Zarahn – Barclays Capital

Just continuing on the rail terminal acquisition, it seems like the majority of the capacity is contracted to third parties. Do you anticipate your marketing group to become a bigger customer over time as contracts roll off? And can you give us a general sense of what the current contract length is on the rail assets?

Greg Armstrong

Certainly. There was a fair component of third party contracts, but we were also a user of those rail facilities as well. For example, obviously at St. James. And then I would just point out that the answer to your question is yes, but primarily because us increasing the capacity, we’re going to go from roughly 140,000 barrels a day of loading capacity to 250,000. And we’re going to go from 140,000 barrels a day of unloading capacity to over 300,000. A fair portion of that, certainly we’ll make available to third-parties when the price is right, but we also have clearly the ability through our supply and logistics to actually be a part of that transport.

Now, we will always – the way we do it, we’ll charge our supply and logistics segment a few just the same as we would charge the third party. So it will show up partly in facilities and then partially in the S&L sector.

Brian Zarahn – Baird Equity Research

And in terms of contract lines today is sort of shorter term two or three-year contracts on average or can you talk about that a little bit.

Greg Armstrong

They generally, I think, here, it’s fair to say, five years is probably a long-term contract for rail and they’ll be as sort as a year, many spot; you’ll give several three – three year type contracts. But I think the longest that we’ve actually initiated to sign is probably five years.

Harry Pefanis

Yeah, that’s right.

Brian Zarahn – Baird Equity Research

Okay, and then in the lease gathering business, I guess, longer term, what type of growth potential do you see in the various basins? I mean, do you think you could be over 1 million barrels a day in terms of lease gathering.

Greg Armstrong

We better. You know, Brian, if you look at what we’re kind of looking for in the Eagle Ford area, clearly we’ve – I think, if we’d have this discussion 18 to 24 months ago we thought the Eagle Ford was only going to be probably about 1.2 million barrels a day. We’ve tweaked that up to about 1.6 million.

In the Permian area where we had originally targeted probably 1.6 million, we think that could grow to as high as 2 million barrels a day. And there’s a lot of, again, cross-current issues. But if you just look at the sheer increase and those volumes and you add on to it the Bakken, we better be at least maintaining our market share; it should drive us up a bunch and we’re not about just maintaining. We’re about growing.

Brian Zarahn – Baird Equity Research

Okay, and then last one for me. Most from an industry perspective, we’re beginning to see some MLP consolidation. Someone has actually done – acquired an MLP. Can you just give your general view of the pace of consolidation? Will it continue or is it just – do you think it’s just going to be a very gradual process?

Greg Armstrong

I think it’s probably going to be pretty dynamic. That word gets used a lot around here, but I think, Brian, we’re up to 90 plus MLPs today. My understanding is that there’s probably 10 to 15 more in the hopper [ph]. It would surprise me if the answer is that number just gradually goes up and doesn’t contract at all with respect to some consolidation. So I think MLP consolidation will be a component going forward. And certainly, we’ve got and had our eyes on things and there’s fundamental industrial logic as to why some of that consolidation should happen. It’s easier to do when the markets aren’t as robust as they are right now because quite candidly people – capital is abundant and it’s relatively cheap and people would rather do their own MLP than they would consolidate.

So a little bit of aberration in the market wouldn’t hurt that at all. But I will tell you just structurally, MLP consolidation is challenging to do and you have to really be committed to it and you’ve got to know that the seller is committed to it because if you have a two-tier GP structure on both sides of it, that’s a whole lot of legal fees and investment banking fees to get that deal done.

Brian Zarahn – Baird Equity Research

Okay, I appreciate that color, Greg.

Greg Armstrong

Thank you.

Operator

And our next question from the line of Ross Payne with Wells Fargo, please go ahead.

Ross Payne – Wells Fargo

Hey, Greg, Ross Payne. A quick question for you, I know the Capline is being reversed and it’s moving kind of, say, north and up into Canada. Does it ever make sense to backload some of these rail cars coming into St. James with condensate?

Greg Armstrong

Let me be clear, I think, I understood what you meant but I want to clarify what you said, Capline right now is not reversed. It’s moving basically crude and condensate north and it’s probably running – everyone is running about probably 30% of capacity.

Al Swanson

Yeah, 35% maybe.

Greg Armstrong

Yeah.

Al Swanson

30% to 35%.

Greg Armstrong

So, clearly, there’s capacity there. I think from time to time dependent upon what the discounts are and what the comparable travel logistics are, there could be reasons to bring different types of crudes into St. James to put on the Capline Systems. I think the answer may be different today than it is six months from now or 18 months because, again, of this robust activity that’s going on in all these areas. So I don’t think there’s – it’s really prudent to try and forecast any particular trend as to what’s going to be shipped on that at the margin because I think the margin will change constantly.

Harry Pefanis

You might see barge movements come over into St. James and go up Capline, I mean, we were set up to receive barge as well.

Ross Payne – Wells Fargo

Okay. All right. So you could also be looking at that as just a crude south at some point as well.

Greg Armstrong

Yeah, and I think you could also look at St. James, Harry [ph], we’re also making modifications to load ships and so, again, I think it’s just going to be a constant state of change if there’s such a word as a constant state of change.

Ross Payne – Wells Fargo

That’s a good thing for you guys. All right. Thanks, Greg.

Greg Armstrong

Thank you.

Operator

And we’ll go next to Becca Followill with U.S. Capital Advisors. Please go ahead.

Becca Followill – U.S. Capital Advisors

Good morning, guys.

Greg Armstrong

Good morning, Becca.

Becca Followill – U.S. Capital Advisors

Hey. On the crude rail car trajectory [ph] thanks for providing that additional data. You guys have the first quarter going from 235,000 barrels a day versus average year for 280,000 which implies greater than 300,000 by year end. Can you talk about the – I know part of it is additional loading, unloading facilities, but can you talk about how many rail cars you’re going to from the first quarter to the fourth quarter and then beyond 2013, what does the trajectory look like in terms of those volumes.

Greg Armstrong

Harry, you want to take that? I can give a directional comment on that. But I think we’re supposed to pick up close to 2,000 rail cars by the end of 2013.

Harry Pefanis

And we’ll be just over 6,000 total rail cars by the end of 2013. A lot of that volume doesn’t necessarily go on on rail cars either, Becca. But I think the range is probably 2,500 going to 6,000 I think [ph].

Greg Armstrong

Yeah. On the crude side, Becca, I think it’s probably close to 2,000 that’s just on associated with the crude side of it. Our NGL is kind of a cost evolving business and it got bigger obviously when we did acquire BP’s NGL assets. In some cases, we provide rail cars to our customers so they may not be but we’re actually controlling the direction of those cars. And as Harry said, we actually then have loading capacity that we provide for a fee to somebody who’s got their rail car going to a different location and vice versa on our unloading.

Becca Followill – U.S. Capital Advisors

Thanks. And then the trajectory beyond 2013?

Greg Armstrong

We peak out just about at that level right now as we see it, and then we’ve staged in and I don’t want to go in to a lot of detail in this call. We certainly will be providing some additional information in our analyst meeting on May 30th as a way of a hook to get you there. But we’ll actually – we’ve maintained, if you will, contractual ladders on our rail cars the same way we do on debt maturities is kind of in reverse right now. We think it’s going to be robust for rail cars for the next couple of years.

But if you were looking at our profile, you’d see us kind of tailing off toward the end of that three to five-year period just because, again, pipelines are the most efficient way to move crude when you have established routes. Right now, we just see for the next three to five years, those routes are going to be – lack clarity as to where the best place to build a pipeline is and therefore and rail cars become the most versatile way to get it to the best market.

Becca Followill – U.S. Capital Advisors

Thanks. And then on a supply logistics segment, same thing, the first quarter LPG sales go from 270,000 barrels a day to a full year of 190,000 implying a pretty big drop off across the year. So can you talk about where you see that drop off?

Greg Armstrong

It’s the seasonality I think. When you – if you recall back to Al’s comments, our fourth quarter and our first quarter are generally our most robust for the NGL sales; another place we’re actually storing it, so when we’re storing it we’re not counting those volumes – is actually moving. So clearly what you’re seeing is probably some shifting of a weak winter [ph] in the late 2012 coming into – coming out of storage in 2013; and a normalization of that into the December or the fourth quarter of 2013. So, there’s no underlying story there of deterioration or erosion. It’s just simply the way you ship, the seasonality between quarters.

Harry Pefanis

Yeah, I think the other thing impacting it, Becca, is if you remember when we did the BP acquisition, we stated that they were sort of net long as a supplier, I mean, in the supply area. Our LPG business or NGL business is typically – our facilities were in market areas. So a lot of times we will be buying from third parties to fulfill our obligations and BP would be selling to third parties to dispose of the supply they had. And what you’re seeing in 2013 is a consolidation of that effort. So some of the BP supply is actually going to our markets in 2013 where that wasn’t fully implemented in 2012 because of pre-existing conditions or arrangements that both of us had.

Becca Followill – U.S. Capital Advisors

Great. Thank you so much, guys.

Greg Armstrong

Thank you, Becca.

Operator

We’ll go to Connie Hsu with Morningstar. Your line is open.

Connie Hsu – Morningstar

Hi, good morning, guys. I just have a quick question on Plains general partner incentive distribution. With the BP acquisition, the GP agreed to for the first time a $10 million reduction in IDRs. And I’m wondering if this figure, if we should expect it to increase over time especially with larger acquisitions going forward?

Greg Armstrong

Yeah, just to clarify, Connie, this is actually the fourth time that we’ve actually modified the IDRs. It is the first time in the $10 million reference was a permanent reduction. The others have been temporal. In connection with the BP acquisition, just for the other listeners out there, we agreed to a $15 million reduction in the IDR for two years and then decreasing to $10 million permanently for perpetuity. And so, that is, Connie, the first time that we’ve actually had a permanent reduction in there.

As far as what we’ve always said and would continue to reiterate, our general partners understand the value and the burdens of the IDR and have shown that they’ll be very flexible to accommodate larger transactions. Clearly, the IDR burden increases our cost of capital. That’s really not an issue at all with respect to organic growth because there’s a huge spread between our returns on our projects and our current cost of capital, even including the GP IDR. But where it really challenges you is on the initial transaction, on big transactions because acquisition transactions typically you’re having to pay a higher multiple and it takes time to feather in the synergies or have the commercial benefits that you’re forecasting.

So I think it’s fair to say that our general partner has steadfastly said they’ll support the growth and make whatever appropriate modifications that’s been requested of management. I think the longest that it has taken is to get approval for an IDR reductions is like 48 hours when we’ve got a transaction that’s in front of them. And so, I think, what you should walk away from here is that, PAA’s general partner can be very flexible and supportive.

Connie Hsu – Morningstar

That’s really helpful. Thank you. That’s it from me.

Greg Armstrong

Thanks.

Operator

And we go to John Edwards with Credit Suisse. Please go ahead.

John Edwards – Credit Suisse

Yeah, good morning, everybody. Greg, I was just wondering if you could comment on, given several other partnerships or companies that have been looking to [ph] to repurpose stained [ph] natural gas pipelines into crude pipeline, just your thoughts on how that impacts your plans and strategies going forward.

Greg Armstrong

Well, we certainly take all potential projects out there into mind. Any time we’re looking at either expanding our pipelines or building new pipelines or even making long-term commitments with respect to say rail cars, et cetera, because clearly pipelines are the most efficient over time. But it just – they may not be taking you to the right market. And so we have looked at – we certainly monitor all the announced projects. We monitor probably several projects that we know or being looked at that may not be visible to the public and we dial those in to our thinking and certainly have reflected a realistic if not conservative impact in the forecast that we provide to the financial community.

John Edwards – Credit Suisse

Okay. And just thoughts on the number of – or the backlog of projects that you’re evaluating, you’ve got this $1.05 billion to $1.2 billion range for capital expansion this year – so backlog and maybe it this – is this reasonable baseline for the next few years going forward?

Al Swanson

What we’ve guided to so far is – and I’m trying to think the last public forecast we made from a multi-year. Last year, I think we gave kind of some charts that showed that we were going to show, I think, for example, for ‘13 we showed $700 million to $1 billion kind of range with what we call an upward bias. Clearly, we’re now formalizing our guidance at 1.1. And so that upward bias is true. We had also given ranges, I think, $500 million to $700 million beyond that, again, with the same kind of common [ph] upward bias. I think, again, the takeaway we wanted people to know that roughly within the ranges that we’ve given, forget the upward bias, we believe that we’ll be able to generate very attractive distribution growth partly because even with the fall off in investment activity levels, so if the investment activity levels remain in the billion dollar plus range, at a minimum it extends that visibility and perhaps even increases either the coverage or the potential growth situation there.

In general, I would say, we’ve got – and if we had this discussion 24 months ago the number was about the same. Then it’s now, we had roughly about 5 billion backlog of – when I say backlog, it’s really a project inventory or portfolio of things that we’re actively monitoring. Some are very high probability. Some of which are maybe not so high and then some are actually just in the possible category, but we’ve seen is is that when one falls out, another one replaces it or one doubles in size in terms of demand.

And so today, we’re sitting there again with kind of 5 billion plus; out of that we pulled an advance is maybe the right way to say it, the projects necessary to fill up the 1.1 billion. Hopefully, by the end of this year, 2013, we will have grown that 1.1. I’d say there’s still an upward bias to that based on projects that we’re trying to advance as we speak. But our visibility in terms of what we would actually say, put in your model, is still probably in the 700 million range in 2014 and ‘15 each; not because we don’t think it can’t be higher but because it’s just not prudent at this point in time to assume that whatever we’re looking at that the environment can’t change. I think we’ve all seen it change. But if you like that answer, you’ll really going to love it if it stays this way.

John Edwards – Credit Suisse

All right. Thanks. That’s very helpful. Thank you.

Operator

And we’ll go to Michael Blum with Wells Fargo. Your line is open.

Michael Blum – Wells Fargo

Hi, good morning, everybody.

Greg Armstrong

Hey, Michael.

Michael Blum – Wells Fargo

One, just to circle back on Ross’ question, just, do you have any update in terms of the potential to reverse Capline?

Harry Pefanis

No.

Greg Armstrong

There’s been a lot more press around it lately but nothing really that we can report.

Michael Blum – Wells Fargo

Okay. The other question I had was actually around Cushing. It just seems like Cushing inventories keep reaching new highs. There have been talk in the past and at some of your meetings about a potential overloaded Cushing and Cushing rates being under some pressure as contracts roll over. I’m just curious what you’re seeing in terms of the environment there right now and if that still is a good assumption.

Greg Armstrong

I think the big difference between – and you’re right, I think, two years ago we made the comment that we worried that Cushing could be approaching an overbuilt situation, in fact, we may have gone so far as to say it probably will be overbuilt, but I probably wouldn’t have forecasted 1.6 million barrels a day out of the Eagle Ford in 1.6 million going to 2 million barrels a day out of the Permian and the Bakken being what it is and then also having Oklahoma also start to participate in this renaissance of crude oil production.

So today it’s certainly not over built. There’s actually move demand and we actually have some projects ourselves. So I’m going to give you the same answer I gave you two years ago, it’s just kind of two years behind. I think it’s still going to feel like – one of these days really get overbuilt but we’re not seeing it right now. Harry, any comments on that?

Harry Pefanis

No, I think that’s right. There’s – a lot of these pipelines that are being built into the corridors [ph] move from West Texas down to the Gulf Coast are going to sort of have some ebb and flow difference coming in to Cushing. But like Greg said, with the growing production forecast in both the Mid-Continent and West Texas, it’s – there’s certainly a demand for tankage right now.

Greg Armstrong

And I would also point out, Michael, that if and when that day ever does come, we think PAA’s tanks are at if not near the top or at the top of the list or certainly near it in terms of desirability because of their pure functional capabilities versus some of the tanks that are really purely repositories for financial arbitrage.

Michael Blum – Wells Fargo

Okay. Great, that’s very helpful. And my last question is just on PNG. I guess, as capacity rolls over there from contracts and – would the plan be for PAA to continue to take more of that capacity over time assuming the market doesn’t improve any time soon and is there any limit to how much of that you want to own directly.

Greg Armstrong

I think the takeaway there is PAA has been supportive in a lot of ways to PNG and will continue to be. We have – if you look at our capacity not only leased today going out a couple of years but also including the capacity we expect to build, I think next year we’ll [ph] still be 80% leased assuming no rollovers from our existing customers, okay, and assuming no new customers. So I don’t think there’s any real identifiable need for PAA to step up to the plate in the next couple of years.

I think part of the situation may depend on how you view the markets whether you think the market stay this way forever or whether you call a turn in the market in two or three years. We will be again at the analyst meeting sharing with you some pretty much in-depth views on our view of what the natural gas storage market could look like over the next three to five years. And if you’ll ask me that same question then I think the answers will probably be a little bit self-evident but I don’t want to go into it on the call here today.

Michael Blum – Wells Fargo

Okay. Thank you very much.

Greg Armstrong

Thank you.

Operator

We have a question from Ethan Bellamy with Baird. Please go ahead.

Ethan Bellamy – Baird Equity Research

Hi, guys, let me just follow up on Michael’s question. Can you help us handicap those probability of acquisitions at PNG and what the posture of the private owners? Are they coming around to a new normal and economic there or are they waiting for some sort of upturn in that environment before they sell?

Greg Armstrong

Great question. I think what is different today and I’ll let Dean dive in here, Ethan, is I think 18 to 24 months ago we were probably one of the first ones that called and maybe a little bit longer than that that we thought the market not only was going to get pretty soft but it could stay soft for awhile. It came in a hurry. I mean, clearly, it didn’t look that way in late ‘09 or early ‘10, but when it showed up, it didn’t look pretty as far as the potential reduction in need for natural gas storage because of the increasing rise in production in natural gas in the U.S. and then also combined with competition in terms of new facilities coming on.

I think what we’re hearing now is repeatedly others are embracing – when we see people announcing that they hope they breakeven next year on their gas storage facilities, et cetera, that’s not what we were hearing from companies two years ago. And so I think the field for potential acquisitions is getting riper and PAA clearly has its view on what long-term gas storage markets will be and it’s got a strong sponsor, PAA, and that we can look at it in the mix of our entire business and talk about kind of the counter cyclical or counter commodity balances that actually provide good risk management.

So I’d say we’re going to – can’t call when people are going to give up and say that having an isolated one-storage facility is not a good business investment. Clearly, we have multiple storage facilities and we also have an energy view across the entire U.S. and Canada that gives us a little bit better platform to be able to consolidate into if and when they’re ready to consolidate.

Dean, you want to comment on people’s views with respect to their assets?

Dean Liollio

Yeah, Ethan, Greg is exactly right. I mean, when you look out there I think it’s going to come down to how committed these, let’s say, one-owner facility – owners of one facility are, how patient then want to be, things will change but are they committed to that, I think some of them got in late and thought things were going to continue as they were a few years ago. And I think you’ll see some reevaluation of what they might do particularly as we go through the next two to three years. So that’s what we’re seeing now.

I think the owners of facilities that are committed to it and have a large portfolio, I think, they are patient and it comes down to the strength of the support and the parent there. So I think you will see some – we will see some opportunities but it comes down to commitment and patience to the business.

Ethan Bellamy – Baird Equity Research

Thank you. Switching gears back to oil. Greg, you talked about expectations for the volumes coming out of the EFS [ph] and the Permian, what’s your expectation for the Niobrara and do you think the White Cliffs Expansion, is that equipped to cover those longings or do you think another expansion or another line is in order?

Greg Armstrong

Well, I think both the expansion of White Cliffs and also – we were putting in a rail facility at Tampa and we’ve got some volumetric commitments, Ethan, behind that and we’ve got certainly some other assets near that can provide additional relief. So I think ultimately, moving volumes out of the Niobrara probably won’t be the problem. The question is where should they go. And at this point in time, rail provides a better swing factor for those volumes on the margin than additional line in to Cushing. And so, ultimately, where they should be routed to is a little bit of a function of just how fast they build it and how the markets shape up. Harry, wouldn’t you agree with that?

Harry Pefanis

Yeah. So, between COR [ph] and our Tampa facility, we’ll have I’d say 100,000 barrels day of our rail capacity out there. You got local refinery demand that’s 50,000 or 60,000 barrels a day. And then you’ve got White Cliffs with the expansion that will be 160-ish a day.

Greg Armstrong

So we think it’s probably going to be adequate. And clearly, once we have, I think, in early ‘14, we expect to have our first half of ‘14, we expect to have our Bakersfield unloading facility and that would give you access to a market right now that’s clearly a pretty good premium. And once we get it there, we have the ability to distribute that crude throughout our existing pipeline systems.

So, again, it’s a dynamic market that if you just look at the current slate of alternatives that take it to market, you’d be probably looking at an incomplete picture that’s going to change over the next 12 to 16 months.

Ethan Bellamy – Baird Equity Research

Thanks, guys. Appreciate it.

Operator

And we have a question from Mark Reichman with Simmons. Please go ahead.

Mark Reichman – Simmons & Company

My question has been addressed. Thanks.

Greg Armstrong

Thanks, Mark.

Operator

Thank you. And our last question will be from the line of Dennis Coleman with Bank of America Merrill Lynch. Please go ahead.

Dennis Coleman – Bank of America Merrill Lynch

Great. Thanks and good morning. Obviously, a lot of exciting market stuff going on here. I wonder if I might just finish with a more mundane question about the balance sheet and the credit rating. I’m encouraged to hear that you’re targeting the high BBB range and you and a couple of your peers seem to be poised for that. I wonder, as you’re thinking about that, are you think that from here, which your credit ratios are quite strong, are you thinking you need further improvement to achieve the high BBB and maybe just talk about how you’re conversations with the agencies are going in that regard.

Al Swanson

No, Dennis, as to do we think we need to improve our credit profile or our balance from here, I think the short answer would be no. We think as we look at kind of the group of MLPs that if the agencies do open up the BBB+ equivalent, our stats and size and performance and credit metrics are right there with the group that would be looked at for that. And so, ultimately, it’s, as I kind of commented, we think our performance, how we’ve managed the capital structure over a large number of years is there once you decide to actually open up that top level of BBB+ criteria. We think that the capital markets view us in that same light with how we trade today. Clearly, again, the agencies have to take the step to say, yes, we’re going to have a BBB+ MLP, and so we’re hopeful that that occurs.

Greg Armstrong

But [inaudible] say expected.

Dennis Coleman – Bank of America Merrill Lynch

As am I. I think the performance does speak for itself. I just – it sounds more like it’s a agency decision than financial sum [ph]. Okay. Thanks very much.

Al Swanson

Thank you, Dennis.

Operator

Thank you, and I’ll turn it back to our speakers for any closing remarks.

Greg Armstrong

We appreciate everyone for participating in today’s call and we know it’s been long. Hopefully, it’s been informative and we look forward to updating you in our call in May. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes our conference for today. Thank you for your participation and for using AT&T’s Executive Teleconference service. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: PAA Natural Gas Storage's CEO Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts