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

Executives

Roy Lamoreaux - Director, Investor Relations

Greg Armstrong - Chairman and CEO

Harry Pefanis - President and COO

Dean Liollio - President

Al Swanson - Executive Vice President and CFO

Analysts

Darren Horowitz - Raymond James

Steve Sherowski - Goldman Sachs

Brian Zarahn - Barclays Capital

Stephen Maresca - Morgan Stanley

Ethan Bellamy - Robert W. Baird

John Edwards - Credit Suisse

Ross Payne - Wells Fargo

Plains All American Pipeline, L.P. (PAA) Q1 2013 Results Earnings Call May 7, 2013 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Plains All American Pipeline and PAA Natural Gas Storage First Quarter 2013 Results Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded. With that being said I’ll turn the conference now to the Director, Investor Relations, Mr. Roy Lamoreaux. Please go ahead, sir.

Roy Lamoreaux

Thank you. Good morning. Welcome to the Plains All American Pipeline and PAA Natural Gas Storage first quarter results conference call. The slide presentation for today’s call is available under the Conference Call tab of the Investor Relations section of our websites at paalp.com and pnglp.com.

I would mention that throughout the call, we will refer to the company by their New York Stock Exchange ticker symbols of PAA and PNG, respectively. As a reminder, Plains All American owns a 2% general partner interest in all of 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 partnerships’ outlook for the future. In order to avail ourselves with 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 partnerships’ 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 Reconciliations 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 of the partnerships’ reported financial information. References to adjusted financial metrics exclude the effect 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 CFO of PAA and PNG. In addition to these gentlemen and myself, we will have some 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. Yesterday after market closed, PAA reported first quarter results that can justifiably be described as outstanding. First quarter adjusted EBITDA totaled $739 million which exceeded the midpoint of our guidance range by $124 million or 20% and the high end of our guidance range by $99 million or 15%.

In comparison to last year’s first quarter results, adjusted EBITDA, adjusted net income, and adjusted net income per diluted unit increased by 57%, 64% and 59% respectively. A summary of our first quarter results is reflected on slide three.

As reflected on slide four, these results marked the 45th consecutive quarter that PAA delivered results in line with or above guidance. Additionally, last month PAA declared a quarterly distribution of $0.57 per common unit or $2.30 per unit on an annualized basis payable next week. This distribution represents a 10% increase over the partnership distribution paid in May 2012 and a 2.2% increase over the partnership’s distribution paid in February 2013. Distribution coverage for the quarter was approximately 200%. As reflected on the bottom of slide four, PAA has increased its distribution in each of the last 15 quarters and 34 of the last 36 quarters.

Yesterday evening we also furnished operating and financial guidance for the second quarter and full year of 2013. Sequentially, our guidance for the second quarter reflects the impact of routine seasonality in our NGL business, as well as our view of the impact that recent and pending infrastructure projects will have basis differentials and on margins in our Supply and Logistics segment.

As we discussed on our last conference call, for the reminder of the year, quarterly comparisons for the Supply and Logistics segment will be challenging as a result of the very favorable market conditions experienced during comparable 2012 periods.

Conversely, segment comparisons for the transportation and facilities segments for the latter half of 2013 should show continued growth as a result of our capital investments. In the aggregate we expect full year adjusted EBITDA comparisons will be favorable.

In that regard, yesterday we increased the midpoint of our full year 2013 adjusted EBITDA guidance by $135 million or 7% to $2.16 million, which exceeds our actual results reported for 2012, which was a year that include significant contributions from our Supply and Logistics segment due to favorable market conditions. PAA continues to execute well in this environment and we are on track to meet or exceed our 2013 goals and to position PAA favorably for 2014 and beyond.

During the remainder of today’s call we will discuss the specifics of PAA segment performance relative to guidance, our expansion cavern program, our financial position, and a major drivers and assumptions supporting PAA’s financial and operating guidance. We’ll also recap -- also address similar information for PNG and at the end of the call I will provide a recap, as well as some comments regarding 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 first quarter operating results compared to midpoint of our guidance, the operational assumptions used to generate our second quarter guidance, and I’ll provide an update on our capital program and our acquisition activities.

As shown on slide five, transportation adjusted segment profit was approximately $175 million or approximately $3 million below the midpoint of our guidance. Volumes of $3.64 million barrels per day were in line with our guidance and adjusted segment profit of $0.53 per barrel was slightly below our guidance, it was primarily due to the higher than forecasted operating expenses.

With respect to our operating expenses for the quarter, integrity management costs were lower than we forecasted, but they were more than offset by cost related to response and remediation activities associated with the couple of pipelines releases and costs which has certain idled pipeline segment to see, I think, we placed into -- return to service.

The first quarter costs related to pipeline releases and to the testing of the idled pipeline segments totaled $16 million and should be non-recurring. However, the lower spending related to our integrity management efforts will timely related and the costs are expected to occur later in 2013.

Adjusted segment profit for the facility segment was $156 million or approximately $6 million above the midpoint of our guidance. Volumes of $119 million barrels per month was slightly below our guidance as rail lines were less than forecast as primarily due to weather and scheduling related delays.

Adjusted segment profit of $0.44 per barrel was above our guidance primarily due to volume metric gains at our NGL storage facility and increase revenues associated with processing improvement at our Fort Saskatchewan facility.

I noted volume metric gains or losses at our NGL storage facility are only recognized after our cabin is empty, which can occur various times during the year but frequently occurs at the end of the storage season once withdrawals are completed.

Adjusted segment profit for the Supply and Logistics segment was $407 million or $120 million above the midpoint of our guidance. Volumes of approximately $1.15 million barrels per day were slightly above our guidance and adjusted segment profit of $3.95 per barrel were significantly above our guidance.

Total performance in this segment was primarily driven by crude basis differentials or wider than we forecast, particularly difference between WTI at Midland and Cushing. The quarter also benefited from a wider than forecasted LLX to WTI differential and wider differential between WTI and several of the Canadian grades.

Let me now move on to slide six and review the operational assumptions used to generate our second quarter 2013 guidance furnished yesterday. For the transportation segment, we are forecasting volumes to average approximately $3.6 -- $3.68 million barrels per day. Adjusted segment profit of $0.55 per barrel and total adjusted segment profit of approximately $185 million.

I’ll note that in the second quarter we expect volumes on certain of our Canadian pipelines to be lower than first quarter as we temporarily take certain line segments out of the service during the high water season up while we replace a few well crossing.

For the facility segment, we expect average capacity of 122 million barrels equivalent per month, adjusted segment profit of $0.38 per barrel and our total adjusted segment profit midpoint is $140 million. The decrease in the third quarter results reflect a seasonal decrease in our gas store business as well as the fact that we did not expect to experience the NGL volume gains recognized in the first quarter.

For the supply and logistics segment, we expect average volume to be approximately 1 million barrels per day. Our forecast for adjusted segment profit is $1.19 per barrel and total adjusted segment profit is $109 million. Second quarter guidance reflects lower seasonal sales volumes in our NGL business as well as the expectation for narrower differentials in crude oil.

As Greg mentioned earlier, infrastructure additions in many of the resource plays are beginning to be placed into service in the second quarter releasing some of the transportation constraint that caused the water differential we saw in previous quarters.

Let me now move on to our capital program. As shown on slide 7, we’ve added several new projects in our last earnings call and as a result, we have increased our 2013 expansion capital plan by $300 million to revise our development approximately $1.4 billion.

Slide 8 provides an update on the expected in-service timing of some of our larger projects. On note that in the aggregate our costs are in line with our forecast, however, we are seeing permitting and right-away matters extend the timing of the in-service state on several of our projects.

Let me now provide an update on some of our major projects. In the Mid-continent we are scheduled for phase 1 of our Mississippi Lime pipeline to be in service in July of this year and for phase 2 and for the phase 2 extension, the Coldwater Kansas will be in service in the fourth quarter.

Recently we finalized plans to construct a 95-mile extension of our Oklahoma pipeline to raise in Oklahoma. The pipeline extension will have 75,000 barrels per day of capacity to provide the excess the increasing production of Granite Wash, [Hub Seater] and Cleveland Sands producing areas and Western Oklahoma and Texas Panhandle. The extension is support of our long term producing commitment and is currently in service by the end of the first quarter 2014. The description of this project is included on slide 9.

Last month we announced that we are proceeding with the construction of the Cactus pipeline, a 310 mile, 20-inch crude oil pipeline that will extend from the McCamey, Texas to Gardendale Texas. The description of the pipeline is reflected on slide 10. Pipeline will initially provide 20,000 barrels per day of take-away capacity from the Permian basin and will connect to our Eagle Ford joint venture pipeline at Gardendale which will then provide access to Gulf Coast liners as well as to our Gardendale rail terminal and our dock facility at Corpus Christi. We signed a letter of intent with the producer for the majority of the capacity of the line and we are in discussions with other potential shareholders for the balance of capacity. We expect this line to be in service in the first quarter of 2015.

In South Texas, we completed the segment of our Eagle Ford joint venture pipeline from Gardendale to Corpus Christi. The connection to dock facility in Corpus Christi is expected to be completed by the end of the second quarter and the extension to the pipeline for connection with the enterprise is expected to be in service in the third quarter of 2013. In Spraberry we recently completed the expansion of our comp plan system and several producer connections. And this is a very active area, we are still at a number of extensions and projects in progress and we expect to be completing these connections through the remainder of the year.

In Canada, we acquired a significant lime position in the (inaudible) area that will provide the opportunity to expand our storage capacity in that area. In addition, we recently announced an open season for proposed Western region pipeline. This is a pipeline that will be joint venture system with care, we will transport cheap plus and condensate to our Ford succession facilities for processing plans from both Gardendale area in North Alberta and the some of that area in Western Alberta.

We will have reasonable turnover on May 15, 2013 I won’t be in a position to provide any more information on this proposed project until we see the results in the open season.

With regard to rail, our loading terminals, permitting delays have extended the in-service base in couple of our facilities. Currently we expect our York count Virginia facility to be placed in service in the third quarter of this year and our Tampa facility to be completed in the fourth quarter.

We’re also continuing to develop our unloaded facility in Bakersfield, California and this is a project we expect to be place in service in 2014, and we’ll complement our existing pipelines in California.

Maintenance capital expenditures for the quarter were $44 million. We expect 2013 maintenance capital expenditures to range between $170 million and $190 million. I’d like to point out that during 2013 we expect to direct about $30 million of our maintenance capital towards replacing certain water crossing and increasing the depth recover of these locations, particularly in Canada working at high water level to run off the melting snow.

Lastly on acquisition front, we are active. We’re just not in a position where we can discuss the specifics of any of our potential opportunity.

So, with that, I’ll turn the call over to Dean.

Dean Liollio

Thanks, Harry. In my part of the call, I will review PNG’s first quarter operating and financial results, our financial position as of March 31, 2013, and our financing activities. I’ll also provide an update on PNG’s capital program and review our second quarter and full year 2013 guidance.

Let me begin by discussing the results we released yesterday. As shown on slide 11, PNG reported first quarter adjusted EBITDA of $31.6 million. This amount exceeded the midpoint of our guidance range by $1.6 million or 5%.

In comparison to last year’s first quarter results, adjusted EBITDA, adjusted net income and adjusted net income per diluted unit increased by 13%, 14% and 13%, respectively. These results marked the 11th consecutive quarter that PNG has delivered results in line with or above guidance and we’re underpinned by our fee-based from storage contracts combined with higher than forecast oil revenues associated with liquids removal activities at our Bluewater facility.

With respect to distributions for the first quarter of 2013, we declared a quarterly distribution of $35.75 or $1.43 per unit on an annualized basis, which is equal to last quarter’s distribution.

Financially, PNG continues to be well-positioned. As shown on slide 12, as of March 31, 2013, PNG had a long-term debt-to-capitalization ratio of 29%, adjusted EBITDA at interest coverage of 13.2 times, a long-term debt-to-adjusted-EBITDA ratio of 4 time and $131 million of committed liquidity.

In March, PNG filed a $75 million continuous equity offering program and through the end of April PNG had sold 1.27 million units raising approximately $27 million of equity capital including the General Partners matching contribution.

We believe this program is the most cost-efficient and least disruptive way to raise equity funding for our ongoing capital investments and fine tune our liquidity, balance sheet and credit metrics.

Operationally, we are on track to complete our 2013 cavern expansion activity on time and in line with our targeted budget range. In April, we brought approximately 4 Bcf of storage capacity into service primarily at Southern Pine and Pine Prairie.

Through continued leasing activities at both facilities, we plan to create an incremental 4 Bcf of low-cost capacity during the remainder of the year. In addition to these capacity expansion activities, we remain active in pursuing opportunities to extend -- and expand our service offerings to meet recent potential changes in the gas market and better service our customer base.

With regards to guidance, as shown on slide 13, we are forecasting midpoint adjusted EBITDA of $26.5 million for the second quarter and $120 million for the full year. We expect distributable cash flow of $22.6 million and $108.1 million for the second quarter and full year of 2013, respectively.

As expected, due to the seasonality of our business, we project distribution coverage for the second and third quarters of the year to dip below 1:1, with implied distribution coverage for the full year of 2013 totaling approximately 102%.

For more detailed information on our 2013 guidance, please refer to the Form 8-K that we furnished yesterday evening. With that I will turn it over to Al.

Al Swanson

Thanks Dean. During my portion of the call I will review our financing activities, our capitalization and liquidity as well as our guidance for the second quarter and full year of 2013. Our financing activities this quarter were limited to our continuous equity offering program. PAA sold approximately 2.4 million units in the first quarter raising net proceeds of approximately 131 million.

As illustrated on slide 14, PAA ended the first quarter with strong capitalization, credit metrics that are favourable to our target and 2.8 billion of committed liquidity. At March 31, 2013, PAA had a long term debt to capitalization ratio of 46%, a long term debt to adjusted EBITDA ratio of 2.9 times and adjusted EBITDA to interest coverage ratio of 9.6 times.

Slide 15 summarizes information regarding our short term debt, hedged inventory and line sale at quarter end.

Moving on to PAA’s guidance as summarized on slide 16, we are forecasting midpoint adjusted EBITDA of $435 million and $2.16 billion for the second quarter and full year of 2013 respectively. This updated fiscal 2013 guidance reflects a 7% decrease in adjusted EBITDA and an 8% increase in an implied BCF from our guidance furnished in February of this year.

As Harry mentioned, our guidance seems less robust market conditions and we experienced 2012 and in the first quarter of 2013 and that is closer to based on an expectation for our supply and logistics segment profitability for this part of the year. Our guidance also assumes a mid-year sale of certain refined products pipeline assets. For more detailed information on our 2013 guidance please refer to the Form 8-K that we furnished yesterday.

As represented on slide 17, based on the midpoint of our 2013 guidance for BCF and distributions to be paid throughout the year, our distribution coverage is forecast to be approximately 135% well above our minimum targeted coverage of approximately 105% to 110%, thus enabling PAA to retain approximately 400 million of excess DCF for equity capital.

Given our strong capitalization at quarter end, the projected refined product pipeline sales and our projection for retained DCF for the balance of the year we have effectively prefunde dour 2013 expansion capital program despite having increase the size of the program by 300 million to 1.4 billion. Additionally as a result of our continuous equity offering program we are also well positioned to finance moderately sized acquisitions and any further increase in our 2013 capital program. As a result, as we discussed last quarter, absent significant acquisition activity we do not expect to execute an overnight or marketed equity offering during 2013.

With that I will turn the call over to Greg.

Greg Armstrong

Thanks Al. PAA delivered outstanding first quarter results and is very well positioned to continue to deliver strong baseline growth throughout the balance of the year and above baseline performance at market volatility and differentials persist. Looking forward we expect to realize additional contributions in the years ahead from nearly 5 billion of organic and acquisition capital investment in the past two years. We have a strong asset footprint and substantially in all the regions in North America where the crude oil production is expected to grow.

Furthermore our multi-billion dollar project portfolio provides visibility for significant organic investment for the next several years and we will remain active in pursuing acquisition opportunities. As always, we will remain focused on prudently financing our growth while maintaining a solid capital structure and a high level of liquidity.

Prior to opening our call up to questions, I want to mention that we will be holding a joint PAA and PNG 2013 analyst meeting on May 30 in New York. At this meeting, we will share our news on industry environment for the next several years, discuss our position with respect to such environment and provide a deeper dive in our activities -- a more deeper dive into our activities is not possible during our quarterly conference calls, or investor conferences. If you have not received an invitation and would like to obtain, please email our investor relations team at info@paalp.com. Thank you for participating in today’s call and for your investment in PAA and PNG. We are excited about our prospects for the future. We look forward to updating you on our activities at our analyst meeting and in our next call in August.

John, at this time, we’d open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) First from the line of Darren Horowitz with Raymond James. Please go ahead.

Darren Horowitz - Raymond James

Good morning, Greg. How are you?

Greg Armstrong

Good morning, Darren.

Darren Horowitz - Raymond James

A couple of quick questions, first, with regard to the new crude oil pipe capacity coming on line and the impact on regional basis differentials that you and Harry alluded to. And I realize it’s a tough question but is there any way that you can quantify as you guys see the impact on basis of contraction around your asset on margins for the back half of this year?

Greg Armstrong

I think the best way to show it is what we reflected in our guidance. If you’re trying to break down, in the first quarter, there was obviously a lot of seasonality and as well as some basis differentials. But I think last year, we estimated that about probably maybe it was around $300 million plus or minus was related to market opportunities that were associated with some of the congestion in the system.

And so a lot of that’s going to be relaying volume metrically, Darren, as we go forward/ And again, we had hopefully given enough of our heads up to everybody that around April 1st this year, we thought the PADDs will start changing. I will point out -- we’ll talk about it more at the analyst meeting.

There is a shift underway between volume metric bottlenecks and then ultimately quality displacement issues that we think probably will create some additional opportunities that may replace some of the opportunities we’ve been experiencing. It’s just pretty early to call that.

We have not forecasted that in our baseline. So we don’t rule it out. In fact, we’re positioning to be able to balance the market and take advantage, capitalize on those opportunities. But at this point, Darren, it’s really hard to forecast what that amount is going to be. So I would take what we’ve got to forecast for the rest of the year as representative of the baseline performance.

Darren Horowitz - Raymond James

Okay. And then my last question and I know that we talked a little bit about our last quarter. But has anything changed from your perspective with regard to handling condensate production growth both out of the Eagle Ford and the Permian. I mean, it seems you could leverage the real capacity at Gardendale and more importantly, you’ve got that dock capacity at Corpus where you could probably move condensate east or maybe even theoretically up in Mississippi corridor. So I’m just wondering how you guys are thinking about it and how you think it possibly about adding some splitting capacity or additional dock capacity?

Greg Armstrong

Well, I think we’ve announced the projects that we think make the most sense to handle not only issues with condensate but just a way that you will like sweet crude in excess of regional demand and the additions we’re making to Bakersfield to Yorktown and some of the other connections that we’re making clearly the ability to connect West Texas with our assets and South Texas which gives us access to different markets as well as rail capability.

So either the California to the East Coast really positions us to do everything you’re mentioning with respect to condensate. I would describe condensate has been a very dynamic market. And we’re going to see changes that will ripple across the industry a little bit as we push out the last of the light sweet crude imports including any condensates that come into the Gulf Coast.

And then we’re going to have an excess of light sweet and condensate in the Gulf Coast that’s either going to be railed or put on barge or as we’ll talk about at our analyst meeting. It’s going to take really all of the above PADD solution to having an excess of light sweet crude there. And differentials are going to be the economic equalizer for those volumes that are in the, excuse me, in the wrong place. Harry, do you want to comment on that?

Harry Pefanis

Yeah. I want to add is, I think there has been a lot of talk about splitters around the country that probably got a decent locations whereas a splitter makes sense. So we are in a position now to discuss whether we would be involved in those splitter or just the transportation. But certainly with the condensate, increasing condensate production there probably will be some additional splitting capacity in U.S.

Greg Armstrong

Darren, I just pointed out one thing, we’re still with amount of production that increased, we have, we still as North America imports about 6.5 million barrels a day, and a lot of that is more medium grades or heavy and sour and again we can displace part of that with lighter production and just takes an extra mile of centers of refiners to do it, or to relocate that product from one place to another within the US.

Operator

Our next question is from Steve Sherowski with Goldman Sachs.

Steve Sherowski - Goldman Sachs

I am just trying to drill down a little bit more into your supply and logistics margin guidance for the second half of the year. It looks like in your recent 8-K reporting towards $0.76 versus the 3.95 this quarter and $1.19 next quarter. I am just wondering what are your assumptions driving that decline, because it is pretty meaning -- you’re just assuming normalization and overall crude spreads or is there one particular that you think is going to contract more than -- that you are more sensitive to?

Dean Liollio

PPI for instance, Mid-land approaching in the first quarter January and February were $10 differential. And that is positive, the Canadian grades, you had Canadian heavy grades that were lot weaker than they were today. And we had some that were $30, $40 differentials and today they are $15, $20 differentials. LOS is coming from $20 to 12 range.

Harry Pefanis

They all had some impact on us.

Greg Armstrong

Steve, what you are seeing after is we are showing, what we call again our baseline against the normalized back half. So I think your term is correct, I think we are all reaching to find out what the real true normal is because it’s not something that’s been seen in a while. I wouldn’t say that we are necessarily co-conservative but I think we are pretty realistic and I would probably say there is more upside than there is downside to our forecast but at this point in time it’s just really hard to bail any more precision.

Dean Liollio

The other thing to remember is that our NGL segment is included in that NGL activities, that can be seasonal, it’s going to impact first quarter and fourth quarter, and it comes off in the second and third quarter.

Steve Sherowski - Goldman Sachs

And if I could just get some insight into Cactus, I guess there is some news out there that the excess pipeline capacity coming out the Permian and also Eagle Ford, what really drove your decision to pursue those projects, was this primarily just producer induced or have you changed your view on Permian and Eagle Ford production?

Greg Armstrong

No change really in the Permian and Eagle Ford, it’s really trying to balance the quality market issues and a lot of water crude will be moving down that line, will be a little bit -- when I say heavy it’s relative term and a slightly bit more sour and so you’re really trying to get right crude to the right market. In some cases the barrels that we will be shipping down there they will displace for an import barrels of the heavier more sour crudes that would normally still have come in to the Gulf Coast through the Corpus Christi market.

Dean Liollio

I think the other thing is we are going through a period of time where you got to ramp up production and production on not capacity, either one of those areas, deferred a lot of production activities, I think for a while here, the pipeline capacity is going to be ahead of production and over time we think you will see (inaudible) coming of the pipelines in the production but in the next 12 months or so, I think you are going to see more pipeline capacity than in production in those areas.

Steve Sherowski - Goldman Sachs

Could you remind me what the EBITDA contribution was for the two product lines that you are planning to divest?

Greg Armstrong

On an annual basis it’s probably between 15 and 20.

Steve Sherowski - Goldman Sachs

Combined?

Greg Armstrong

Yes.

Operator

And next we will go to Brian Zarahn with Barclays Capital.

Brian Zarahn - Barclays Capital

The majority of the capacity in under LOI, can you give us a little more color as to how much and also if there is demand long-term, how much could the passive one be increased?

Greg Armstrong

At this point in time, what we will say is majority equates to more than half and we will incur some other commitments on there. I think if we increase the pump capacity…

Harry Pefanis

Almost 280,000 barrels a day.

Greg Armstrong

So, you’ve got about 40% increase in capacity over what we will start with and if it’s needed.

Brian Zarahn - Barclays Capital

And in terms of the capacity that you expect to be under contract, are those long-term contract or would that be a long-term contract?

Greg Armstrong

Yeah.

Brian Zarahn - Barclays Capital

Okay. And on the topic of crude differentials, any impact to your crude rail terminals?

Greg Armstrong

Not really against our acquisition or a construction economics. It may take away some of the upside that you would have experienced during periods where we also engage in the merchant activities to be shipped from our own lands but nothing from an adverse level to the investments that we make. So we expect to see the volume continue through the rail terminals. On a commercial side, removing those volumes, the margins have narrowed.

Brian Zarahn - Barclays Capital

And then on your, you raise 2013 expansion CapEx. Any change to your sort of long-term average expansion CapEx?

Greg Armstrong

Well, we are always a little bit more cautious once we get out of the current year. We are feeling more and more comfortable that between what we’ve got to invest this year that will actually carryover into next year that we are base loading next year. If we had to give a range today, it might be a couple $100 million higher than what we would have discussed.

At the beginning of the year, I think we had forecast around $700 million in out years. Today, that number will be probably close to $900 million to as much as $1 billion for 2014. But again, it’s pretty preliminary at this point, Brian but the bias has always been to the upside as we developed and actually crystalized some of these projects.

Clearly, Cactus is an example. There is only a portion that will get spend in 2013. The balance probably will get spend in 2014. So it makes up a fairly high component and trying to -- we’ve tried about directional charge with the check mark certainly when these projects are coming on stream. Clearly, there is -- some of them start off near 50% to 75% of run rate, other start a little lower, some a bit higher. But the good news is that we feel really good about the momentum if you will of the capital investments we’ve made carrying through 2014, ’15 and even into ’16.

Brian Zarahn - Barclays Capital

That’s helpful. Last one for me. From an industry perspective, can you comment on more recent MLP consolidation activity?

Greg Armstrong

Only to the fact that we probably made a prediction of it three, four years ago and has been a little bit longer coming and since we made that prediction by the way, it’s still that you more shrinking this ground. So it just proves that we will forecast everything with great precision. But I think there is certainly a lot of consolidation, Brian that makes sense. It’s hard to do when the capital markets are as robust as they currently are. If there is a contraction in the capital markets, I think we would just see an increase in consolidation.

Brian Zarahn - Barclays Capital

Thanks, Greg.

Greg Armstrong

Thank you.

Operator

And next, we will see Stephen Maresca with Morgan Stanley. Please go ahead.

Stephen Maresca - Morgan Stanley

Hey, good morning, Greg and team.

Greg Armstrong

Good morning.

Stephen Maresca - Morgan Stanley

First question on guidance. For second half of this year and acceleration in the transportation adjusted EBIDTA and just some color into that I guess some uplift on Permian Basin volumes. But also see a jump a little bit in profit per barrel. I guess, what’s the driver there?

Greg Armstrong

Some of it’s going to be the timing of the expenses that Harry mentioned. We schedule some of this work and it gets pushed around a little bit. So, I think by the time you get to the end of the year you are saying what I would call more of a normalized rate on that as opposed to -- we had a couple of releases in the first quarter that kind of replaced some expenses we thought we are going to be incurred in the quarter and got pushed to later quarters

By the end of the year though we are pretty much looking at kind of -- I’d say a normalized level, realizing that by the time we get there, Steve, there maybe shifts in that. But overall I would say it’s just the impact of projects that will be coming on stream as we pick up those volumes and the variable expenses associated with that will be pretty minor and lot of the fixed expenses that are already built into our outlook. And if you look at April 1 to the end of the year, part of that is driven by the refined products pipeline, which is expected to be close by the end of the first quarter. Now we are forecasting by the end of the second quarter. So that is a little bit of EBITDA impact relative to our overall guidance.

Stephen Maresca - Morgan Stanley

And then Harry I think you mentioned, something along the lines of your permits and right aways, and stand in time to completion on projects, I guess how much time it is extending in and is this impacting all projects especially specific areas or type of asset?

Harry Pefanis

No, it’s not tremendous, it’s about -- West Texas all the (inaudible) pipelines and connections, we had probably delayed 90 days or so versus when we originally thought it would be online, it’s primarily dealing with right-aways somewhat going down, and plant owners are more sophisticated and it has delayed the progress a little bit. Permits have mainly been around some of our rail facilities in Eagle, Tampa, permissible longer, probably delayed those projects by 90 days as well.

Greg Armstrong

So nothing real big but as you know any time you have an extension, it calls for a little bit more on balance, when you look at our programs, Steve, the cost increases are in most cases more than offset by cost decreases where we have executed as scheduled. And so in total the program economics really haven’t changed, it’s just a little bit of a delay in timing on some of these when they come on stream, and again not six months, or nine months or a year but more than 90 days to 120 days.

Stephen Maresca - Morgan Stanley

Appreciating that you guys have actually been accelerating growth in terms of distribution payout and also having very heady distribution coverage, any thought about where you consider ramping growth even more in the payout even if it is something is more of a one time growth where you grew really strong for 2013 but went back down a to baseline 10% for 2014 and beyond because you felt comfortable there. But just given how much growth you have in coverage you have right now, have you thought that?

Greg Armstrong

We thought about it, absolutely.

Stephen Maresca - Morgan Stanley

I may be afraid, what do you think about it? I never ask just the yes or no question right?

Greg Armstrong

See I think we constantly try to balance the level of distribution growth that takes for us to be competitive with our peers and to achieve what we think is the optimal cost of capital there is a point of diminishing returns if we raise the distribution too rapidly and it doesn’t result in a correlation -- correlating the adjustment to our cost of capital because we are -- the consumers of capital on balance, and so right now the 9 to 10% range is being what call best in class for large cap low risk MLPs, and I think our unit price and trading yield reflects that best in class performance. When you look at it and we are retaining the share close to 400 million, last year it was close to 600 million. What that does is that it allowed us to save capital cost as we issue -- we distribute that and then of because we are growing the business we asked for it, the friction cost on that can be fairly significant and so we are saving that friction costs for the benefit of the unitholders, we are also then staying away from overnight market equity offerings which we think are disruptive to the consistent increase in the unit price because it tends to create disruptions in the market. So we are constantly trying to fine tune that balance, if we felt that it took more distribution growth to be competitive with our peers and achieve the optimal cost of capital, we certainly have that horsepower to be able to do it in our coverage. But right now 9% to 10% feels fairly appropriate if not at the top of the class so to speak within the risk profile that we provide.

And if we can do that for multiple years, and we haven’t even extended levels, I think that’s going to be best and best in class.

Operator

Our next question is from Ethan Bellamy from Baird.

Ethan Bellamy - Robert W. Baird

Hey, good morning, guys. Obviously, an epic quarter on supply and logistics. Everybody is banging their way on new infrastructure. So, I kind of want to ask a kind of a cyclical question, which is do you think that crude differentials ultimately are going the way of gas differentials and if so, where does that leave you guys?

Greg Armstrong

Certainly directionally, we were seeing some move of differentials tightening up. I think the major difference is between the oil and gas. Gas, once the sale revolution hit and there were so successful where they took gas prices from $13, all the way down to $2 at one point and caused a tremendous build-in infrastructure and the fundability of gas then once with excess infrastructure and kind of a capital where production could grow because of the economics. It really kind of even everything out.

On crude oil, it’s a much more regional issue and on top of that, we are still importing 6.5 million barrels a day to North America, the majority of that coming into the U.S., probably close to about 5.9. And so we still have ways to go before we reach the displacement equivalent there whereas on natural gas it didn’t take much, only about a 5% of the total consumption was being imported. Now, they are talking about exporting. I don’t think we are going to talk about exporting crude for quite a few number of years in terms of those types of volumes.

Any exports would really be related to try and balancing the quality issue that we talked about earlier. It would really make sense if we didn’t have government restrictions in many cases to exports like swing to the most appropriate market, and continue to bring in heavies. But we really don’t have that luxury with some limitations or exceptions going to Canada.

So, I think for the next several years, we are not showing that we are going to totally displace foreign and waterborne imports for -- well, I don’t think we will ever totally displace it because I think the economy will recover so. But those are new forecast, parity so to speak, really forecast in the year 2020.

Our crystal ball gets real fuzzy beyond three years and it goes all most completely black beyond five years. So, I’d say right now we feel very comfortable with the current situation as long as there is no interference from government in terms of continued to be able to develop the resources that we’ve identified -- that the industries identified in the U.S.

Ethan Bellamy - Robert W. Baird

Thanks, Greg. That’s helpful. On to PNG, once a deal sort of look like in gas storage -- are you seeing any capitulation on the part of private equity owners in that area yet or are any asset being marketed?

Dean Liollio

Ethan, this is Dean. It’s pretty quiet at least right now with the market begin kind of bouncing off the bottom. I think most have decided to right out the storm. I mean, we certainly feel it’s going to change in the next two to three years with the demand building up. But I think most have decided to right it out, so we’re not seeing much activity at least currently in that area.

Greg Armstrong

I think what you are seeing, Ethan and there is certainly one very public natural gas MLP that’s pretty much acknowledged that the markets not going to return to what we saw five years ago anytime soon with their certain recapitalization. So, I think there are signs of acceptance that this maybe in the new normal market for a while. And once you kind of get to that point I think it’s just a matter of time that when people will then say, how do I best create value consolidation and synergies that come from not only administrative sites but operational flexibility.

It’s certainly a -- it should be a driver in those thought processes. So again, I think it’s ultimately going to get here. It’s just a question of lean point of that, how long -- we’ve used the analogy before that, we think it’s coming and we think we can hold our breath longer than everybody else and generate results that support our current distribution on a one-to-one basis with potential for growth, as we ultimately see a slight market recovery.

If and when, some of the events that we think are going to be coming to path, what I call the intermediate to longer-term that being probably in the three year out period. Looks pretty encouraging, what we would in part of that at your Analyst Meeting. But you can assume that it includes issues with respect to gas exports as well as a lot of conversion of power plants from coal to natural gas. As you see that demand increase and you also see some of the pikes that are currently excess capacity in the gas business being converted to liquids capacity, it starts to take some of the slag out of the system. So I think those motivating factors may cause some people say we will be better to attack that at a larger scale than what any of the sour individually right now.

Ethan Bellamy - Robert W. Baird

The excess profitability on liquids recoveries for this quarter, is that expected to continue and is that in guidance and can you kind of quantify that for us?

Al Swanson

That’s really related Ethan to (inaudible) water, those conditions really just exist for 1Q, little bit into 2Q and has to do with customers withdrawing gas at least this year compared to other years, emptying out the reservoir, when those conditions exist, we can get more oil production and really occurs in the first -- mainly in the first quarter a little bit in 2Q. Once they start filling back up, the facility fills back up with gas, those type of conditions go away and that kind of production dampens itself and really on a year to year basis, it depends what the customers do to dictate that kind of production.

Harry Pefanis

If you recall last year total volumes in storage really hit all new time highs at the low point. And so we really didn’t have as much opportunity last year this year, we are seeing, but it would be closer to more of a normal five year withdrawal.

Ethan Bellamy - Robert W. Baird

And the 8b review capacity, I think four coming online soon and four the end of the year, is that contracted and marketed and is it going to be accretive when those are brought online?

Dean Liollio

Some of that is already contracted, and some of it’s not, I would say about 50:50 right now.

Greg Armstrong

Ethan, the important thing there is we are adding that space at such low cost that even in the current mid market that we are in, the individual capital investments are actually generating attractive returns. The offset of that is we have some contracts that are at higher rates that are rolling off, that will be recontracted but they will be recontracted lower rates and what happened is that the economic gains of incremental capital investments are offsetting the contractual diminution in value coming from high rate to the lower rates. That’s one of the new things about PNG as an investment is, what we are doing is we are kind of holding our own but we are really coiling if you will for future growth and the future that we are expanding our storage capacity and we get a two or three penny increase in storage rates which sound small but as a percentage wise that’s 15% to 20% current rates, you can imagine what that looks like as you apply to that expanded storage capacity.

Ethan Bellamy - Robert W. Baird

Last thing for both PAA and PNG, should we modelling the same level of ATM equity sale that we saw in Q1?

Greg Armstrong

I think for PNG you would see a more moderate, we had an opportunity there where there are some new funds that were coming to market that hit us about the time that we announced that ATM and so it’s just logical to basically pull the trigger and kind of fill the van and we didn’t put 100% of it, so we got some market support I should say. On PAA, I would say we are going to pace ourselves relative to our capital program outlook and acquisitions. We will air on the side of being over capitalized one because we have the excess capacity, and two, we believe while we are not currently announcing the acquisitions that we will be inclusive, and we just think it’s a lot more beneficial to all of our unitholders to acquire capital at lower friction cost and least disruption to the market. And so far we treat to be able to do both. So I would say we will continue to pace ourselves. We may increase or decrease in any given quarter depending upon that outlook but overall we will try to be more bashed towards an over equitized balance sheet.

Operator

Our next question is from John Edwards with Credit Suisse.

John Edwards - Credit Suisse

Just I guess before you come back to the guidance on supply and logistics, just for a moment, the margins you are guiding to, looks like -- haven’t been that -- they haven’t done that well since about the second half of 2010 when there was very little spread between Brent and WTI and so I was just curious on -- how much of that is in there or is it just bias for being conservative in case of these pipes coming on, do you see a more dramatic contraction in those spreads and then maybe represent in the futures market.

Greg Armstrong

I’ll address the philosophy. I’ll let address Harry address the details. I would say if the bias to be is realistic as we think we should be, I would not call it conservative per se because I think what we’re forecasting is a very realistic outlook. I think it’s hard and I mentioned earlier we’re trying to figure out what -- when we stop that return to normal is trying to figure out what that normal is.

It’s been such a dynamic market with changes in production growth, pipeline capacity, new pipelines et cetera that is really hard to kind of PEG/water anomaly. I think kind of run a one year, two year, three year normalized average is interesting but it’s almost irrelevant because at the end of the day, there’s also been a lot -- a significant increase in competition in those markets. And ultimately, if there is an excess of pipeline capacity, people are going to try and fill that, that typically lowers rates.

So I think we’re realistic about what potential impact could be even if margins between WTI and Brent stay in $10 range. But so -- anyway the takeaway from my comment is it’s realistic. It’s opposed to conservative but keep in mind that our whole goal is always to under promise and over perform. With that philosophical issue, I’ll let Harry talk about the detail.

Harry Pefanis

I think Greg hit most, I mean, they are realistic and that differentials have come in quite a bit. Even Brent and WTI is around $10 or so. A lot of the differentials reflect sort of the transportation differential to get to that market. So there is a whole lot of quality differential involved. Just look at Midland and Cushing differential is actually trading positive. Midland went over Cushing today. A lot of the Canadian crudes are in as tight as they have been in long time. So I think they are realistic.

And I’ll just -- part of the environment that we are in. I think we’ve thought for long time that the supply and logistics margins would come in and overtime they would transfer to our transportation related activities.

Greg Armstrong

If you go back, John, the important thing to remember is 99% of all of our capital investments are focused in on the transportation facility side with the fee base part of it. And while we don’t have those slides in today’s presentation, if you look at our first quarter, excuse me -- our year-end presentation, we show the directional pattern there of what the transportation facilities, EBITDA growth was going to be.

So I think if you take an average and I will throw out just a place holder not a precision number of $500 million for the supply and logistics in, kind of, a normal base line. And then you add that to a growing transportation facilities EBITDA outlook, I think you’re going to like the growth curves that support continued distribution growth and still fairly high retention of DCF.

That does not rule out that there will be opportunities for supply and logistics to over perform that baseline. I think that’s inherent in our business model and inherent in the markets that we’re going to be encountering. Having said that, trying to predict which quarter that’s going to show up in is almost possible.

So I would not call what’s been going on as nonrecurring in terms of the over baseline performance. I would just say it’s very hard to predict. And there maybe periods of time including as much as a 12-month period where you might not see significant over performance. But if you ask me at the end of two years or three years, would we have seen -- failed to see opportunities that would be surprise and we’re positioned to actually capitalize on those, both tactically and financially.

Dean Liollio

And John, I’ll add one thing. You might be looking at the per unit metric we’re showing in the second half in the 8K. If you actually look at how we modeled, embedded inside of the guidance, we have a typo there. It is in $0.76 per barrel, it’s a $0.15 roughly for the second half.

And so again, what Greg described, if you take our second half supply and logistic and annualize that you come real close to kind of the baseline number, just we have one typo. It didn’t drive any assumptions, it’s just the informational feel. So, again, we’ve seen a reversion back closer to the $15.20 on Supply and Logistics which is a level we haven’t seen for a period of time as you mentioned.

John Edwards - Credit Suisse

All right. Yeah. The detail is really helpful. Thank you very much.

Operator

Our next question is from Ross Payne with Wells Fargo. Please go ahead.

Ross Payne - Wells Fargo

How are you doing guys? Obviously, acquisitions have come up a few times during this call. I just want to ask you is, is the order of magnitude is this something that would be somewhat transformative or is it kind of heading singles and doubles? Thanks.

Greg Armstrong

Now you got me in a corner, right? Harry said we can’t comment and now you are saying that I comment. I think the opportunities, I will be circumspect but hopefully one point. I think the opportunities that are out there today are more singles and doubles not homerun type of things that are in the market today that could change 30 days from now or six months from now. But we don’t shy away from those. But right now it’s like there is more singles and doubles type of opportunities out there as opposed to transformative issues.

Ross Payne - Wells Fargo

Perfect. Thanks.

Operator

And with no further questions in queue, I’ll turn it back to presenters.

Greg Armstrong

If there are no other questions, we’ll go ahead and close the call right at about an hour looks like. But we want to again appreciate everybody attending and we also appreciate your trust and support financially as we continue to grow PAA. Thank you.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. 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: Plains All American Pipeline's CEO Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts