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

Q2 2012 Earnings Call

August 7, 2012 11:00 a.m. ET

Executives

Roy Lamoreaux – Director of Investor Relations

Greg L. Armstrong – Chairman & CEO

Al Swanson – Chief Financial Officer

Harry Pefanis – President & COO of PAA

Dean Liollio – President of PNG

Analysts

Darren Horowitz – Raymond James

Brian Zarahn – Barclays

Ted Durbin – Goldman Sachs

Michael Blum – Wells Fargo

Ross Payne – Wells Fargo

Selman Akyol – Stifel Nicolaus

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the PAA and PNG Second-Quarter Results Conference Call. (Operator instructions) At this time, I will turn the conference call over to your host, Director of Investor Relations, Mr. Roy Lamoreaux. Please go ahead, sir.

Roy Lamoreaux

Good morning and welcome you to the Plains All American Pipelines and PAA Natural Gas Storage’s Second-Quarter 2012 Results Conference Call. The Slide presentation for today’s call is available in 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 will refer to the companies 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 the [intended] distribution rights and approximately 62% as a limited partner 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 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 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 EBIT and EBITDA. The non-GAAP reconciliation section of our website reconciles certain non-GAAP financial measures to the most directly comparable GAAP financial measures and provides a table of selected items that impact comparability with the partnership’s reported financial information. References to adjusted financial metrics include the effect of these and 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, 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’ll 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 L. Armstrong

Thanks, Roy. Good morning and welcome to everyone. Continuing a multi-quarter trend, PAA delivered strong second quarter results underpinned by solid fundamental performance and enhanced by favorable market conditions.

Yesterday after market close, Plains All American announced second quarter adjusted EBITDA of $522 million. These results exceeded the midpoint of our guidance range by $62 million, or 13%, and were $42 million above the high end of our guidance range. These results are also consistent with the updated estimate of expected second quarter performance that we provided in a press release issued on May 30th, despite the impact of an $11 million charge associated with Rangeland Pipeline release we experienced later in June.

Current year results compare very favorably to last year’s second quarter as adjusted EBITDA, adjusted net income and adjusted net income per diluted unit for the second quarter of 2012 increased 43%, 53%, and 46% respectively.

Highlights of PAA’s second quarter performance are reflected on Slide 3, which also illustrates the PAA’s distributable cash flow in second quarter of 2012 was 165%. PAA’s second quarter results were driven by solid performance in all three segments with the Supply & Logistics segment being the largest contributor to overall performance. The second quarter results mark the 42nd consecutive quarter that PAA has delivered results in line with or above guidance.

In July, PAA declared an 8.4% year-over-year increase in our annualized run rate distribution to $4.26 per common unit. As shown on Slide 4, PAA increased its distribution each of the last 12 quarters and in 31 of the last 33 quarters. Over the last 11.5 years, PAA has grown its distribution at a compound annual growth rate of approximately 7.5%.

Yesterday evening we furnished financial and operating guidance for the third quarter and the balance of the year increasing the mid-point of our full-year 2012 adjusted EBITDA guidance by $80 million. This represents an approximate 4% increase over the full-year guidance provided on May 7th, 2012, and a 14% increase over the full-year guidance we provided at the beginning of the year. PAA has executed well in this environment and we are on track to meet or exceed our 2012 goals.

Additionally, yesterday we announced several new capital projects or expansions of existing projects that we expect to implement over the next 12 to 24 months and are expected to yield attractive financial returns.

During the remainder of today’s call, we will discuss our segment performance relative to guidance, our expansion capital program, our acquisition and integration activities, and our financial position. We will also address the drivers and major assumptions supporting our financial and operating guidance for the third quarter of 2012. We will address similar information for PNG, and at the end of the call, I’ll 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 give you our second quarter operating results compared to the midpoint of our guidance we shared on May 7th. I’ll discuss the operational assumptions used to generate our third quarter guidance, and I’ll also discuss our 2012 capital program and acquisition activities.

Shown on Slide 5, adjusted segment profit for the Transportation segment was $4 million above the midpoint of our guidance. Volumes for the segment were 3.56 million barrels per day and were in line with guidance, as adjusted segment profit of $0.56 per barrel.

As Greg mentioned, the quarter’s results included the impact of an $11 million charge related to the previously announced crude oil release on the Rangeland Pipeline System. That charge is net of expected insurance reimbursements. The cause of the incident is under investigation and our clean-up efforts our ongoing. This segment of the line remains out of service.

Adjusted segment profits for the Facility segment was $119 million, $4 million above the midpoint of our guidance. Volumes of 109 million barrels were in line with guidance and adjusted segment profit of $0.36 per barrel was slightly above the midpoint of our guidance.

The primary contributors to the financial performance were increased fee-based activities at our St. James and Cushing terminals and a stronger than forecasted results from our natural gas activities.

Adjusted segment profit for the Supply and Logistics segment was $221 million, and that’s $53 million above the midpoint of our guidance. Our total volumes were 971,000 barrels per day and included 814,000 barrels per day of lease-gathering volumes and 153,000 barrels per day of NGL sales volume.

The lease-gathering volumes were slightly below our guidance primarily due to the timing of connections to our gathering system in south Texas. Our NGL sales volumes exceeded our guidance primarily due to the timing of propane sales associated with the acquisition of BP NGL assets.

Adjusted segment profit per barrel was $2.50, or $0.54 barrel above the midpoint of our guidance. That’s primarily due to strong lease-gathering margins and a wide Midland Cushing differential.

However, our NGL margins were weaker than forecasted and that’s primarily due to the impact of inventory cost accounting in a declining price environment.

Let me know move to Slide 6 and review the operation assumptions used to generate our third quarter 2012 guidance, which was furnished in our Form 8-K last night. This Slide has been reformatted from prior conference calls to present the midpoint of our third quarter guidance compared to actual results for each segment in the same quarter the prior year, and for the immediately preceding quarter.

Let’s start with the Transportation segment where we expect volumes to average approximately 3.59 million barrels per day, adjusted segment profit to be $0.57 per barrel, and adjusted segment profit to be $188 million. All these values are generally in line with our second quarter results.

The Facility segment guidance assumes an average capacity of 112 million barrels below equivalent. The 3 million barrel increase primarily related to additional natural gas storage capacity placed into service in the second quarter, as well as capacity expected to be brought to service in the third quarter. Adjusted segment profit is expected to be $115 million, or $0.34 per barrel in the third quarter.

Supply & Logistic segment volumes are projected to average 945,000 barrels per day in the third quarter of 2012. The projected midpoint for adjusted segment profit is $106 million or $1.22 per barrel for the third quarter.

The third quarter guidance is lower than the second quarter actual results primarily due to a combination of a lower Midland Cushing differential and then lower NGL sales prices. However, lower NGL prices will negatively impact margins in the third quarter. This is largely a timing issue associated with the impact of inventory cost accounting and higher margins are expected later in the NGL season, most likely in the first quarter 2013.

Now let me move over to our capital program. We have a number of new capital projects as summarized on Slide 7. We are increasing our forecast for 2012 to a range of $1.1 billion to $1.25 billion.

I’ll provide an update on some of our existing projects. I’ll also touch on a couple of our (inaudible) projects.

First, let me start with our Eagle Ford project; an announcement was made last night. We have formed a joint venture with Enterprise Products, which would provide portions of our crude oil infrastructure projects in this area. Our original project will be expanded to include a 20-inch pipeline segment from Three Rivers to Lyssy, which is the origination station for the Enterprise pipeline from the Eagle Ford area to Houston.

The joint venture pipeline system is the red pipeline on Slide 8. The pipeline is supported by a long-term shipper agreement covering approximately 210,000 barrels a day or roughly 60% of available capacity. We believe the joint venture system will provide producers with more flexibility than any other pipeline in the Eagle Ford are and believe our $1.25 tariff for uncommitted shippers will be the most competitive tariff in the area.

Slide 8 also highlights expansion of our Gardendale gathering system that we also announced yesterday. The project will include 90 miles of new gathering lines. Those gathering lines are shown in green on the map, as well as a new condensate stabilization facility being constructed adjacent to the Gardendale terminal. The gathering system expansion and stabilizer are underpinned by producer agreements.

Yesterday morning we announced a new 40-mile, 24-inch pipeline to be constructed from our Ten Mile facility in Alabama. This project is underpinned by a long-term agreement with a shipper and is expected to be in service by the fourth quarter 2013.

Also, yesterday morning, we announced that we were constructing a new crude oil rail loading facility in Tampa, Colorado, and expanding our rail offloading facility at our Yorktown terminal. The Tampa facility will be capable of loading a unit train and is underpinned by producer commitments.

The Yorktown facility currently has manifest train unloading capacity, but will be expanded to have capacity to unload two unit trains a day. We’re also making a number of other modifications to the dock and related infrastructure at Yorktown. Both projects, which are discussed on Slide 9, are expected to be in service by the third quarter of 2013.

As discussed in our press release yesterday, we have completed or our nearing completion of a number of pipeline expansion projects putting over 145 miles in a 9-county area in the Permian Basin. These projects which are designed to provide a total of 200,000 barrels a day of additional gathering capacity to Bone Spring, Sprayberry, and [Wilkberry] producing area will be connected to our basin pipeline system, as well as the Longhorn and the Mesa Flatfoot Texas Gulf Systems.

Our Bakken North project is on target to be completed by the end of 2012. However, the connections with Endbridge at Regina in Canada will be likely set to 2013.

We recently started construction of our Rainbow II pipeline project. It’s a ten-inch pipeline; it twins a Rainbow pipeline system and will move diluent north from Edmonton to Nipisi. The line will have an initial capacity of approximately 35,000 barrels per day and will supply producers with diluent needed to move an increasing supply of heavy oil production from the (inaudible) area. We expect the line to be in service by mid-2013.

Our maintenance capital expenditures for the second quarter were $40 million and we continue to expect maintenance capital expenditures for 2012 to be in the range of $140 to $160 million.

On the acquisition front, we are actively reviewing and evaluating a number of strategic and accretive opportunities. But as you can imagine, for competitive reasons and confidentiality restrictions, we are unable to discuss specifics with respect to any of those activities. However, with respect to our integration efforts, I’d note that as reflected on Slide 10, we are on target with a major integration milestone we established for the BP NGL acquisition and have substantially completed the integration of the acquisition that we made in 2012.

With that, I’ll turn the call over to Dean to discuss PNG’s operating and financial results.

Dean Liollio

Thanks, Harry. My part of the call I will review PNG’s second quarter operating and financial results and our financial position as of June 20th, 2012, provide an update on PNG’s operation and capital program and review our second quarter and full-year 2012 guidance.

Let me begin by discussing the results we released last night. As shown on Slide 11, PNG delivered second quarter 2012 results in line with the guidance we provided in May. Adjusted EBITDA for the second quarter 2012 totaled $29.7 million resulting in adjusted net income of $18.6 million and adjusted net income per diluted unit of $0.25.

A portion of the overperformance relative to the midpoint of our guidance is timing-related, as we were able to realize certain profitability for storage capacity that we managed for own account sooner than originally forecasted. The remaining portion of the overperformance is due to lower expenses and incremental revenue resulting from market volatility during the quarter. This is partially offset by lower liquid volumes at Bluewater due to lower than expected storage withdrawals during the second quarter.

In comparison to last year’s second quarter result, adjusted EBITDA, adjusted net income, and adjusted net income per diluted unit for the second quarter of 2012 increased 8%, 9%, and 9% respectively.

As reflected on Slide 12, PNG’s second quarter results mark the 8th consecutive quarter of delivering results in line with guidance.

Financially, PNG continues to be well positioned, including on Slide 13 is a condensed capitalization for PNG as of June 30th, 2012, highlighting PNG’s long-term debt-to-capitalization ratio of 28% and long-term debt-to-adjusted EBITDA ratio of 3.8 times and $187 million of committed liquidity that reflects the benefit of the $100 million increase we recently completed to our revolving credit facility.

Additionally, effect June 1st, 2012, we amended our $200 million note with PAA to reduce the interest rate to 4% from 5.25% and extend the maturity to June 2015.

Operationally, we are on track to complete our 2012 capital program on time and on budget. Our 2012 expansion capital plan calls for expenditures to range between $56 million and $60 million. We expect to have a total of approximately Bcf of working storage capacity in service in 2012, increasing our average working capacity for 2012 to 84 Bcf, representing an 18% increase over our 71 Bcf average working capacity in 2011.

In June, we placed our fifth cavern at Pine Prairie into service, and we have received the necessary regulatory approvals and plan to place our fourth cavern at Southern Pines into service by September 1st.

Additionally, throughout the year, we have been and expect to continue to create additional capacity through our incremental leaching activities at both Pine Prairie and Southern Pines. Overall we expect to exit 2012 with aggregate capacity of approximately 92 Bcf, a 21% increase over the 76 Bcf of capacity that we had entering into 2012.

Moving onto the market, conditions for natural gas storage remain challenging and we continue to position PNG to manage through a continuation of the conditions we have experienced over the last 18 months.

With that outlook in mind, and as represented on Slide 14, our annual guidance for 2012 is essentially unchanged with our adjusted EBITDA forecast for 2012 estimated to range between $116 million and $124 million with a midpoint of $120 million. This guidance represents a 12% increase over our 2011 comparable results. For the third quarter, we expect adjusted EBITDA to range from $25 million to $29 million with a midpoint of $27 million.

As depicted by the chart in the upper right of Slide 14, adjusted EBITDA for the first three quarters of the year is expected to remain fairly consistent with a seasonal increase forecasted for the fourth quarter.

With respect to distributions, in early July 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 May 2012, and equates to a 3.6% increase over the distribution that was paid in August 2011. Our distribution coverage for the second quarter was 104%. Achieving the midpoint of our guidance for 2012 also provides 105% coverage of our existing distribution level.

As we have noted in previous calls, an important component of our business strategy is to commit a high percentage of our storage capacity to firm storage contracts. As a result, PNG’s distribution is underpinned by a diverse portfolio of third party firm storage contracts with initial terms ranging from one to ten years in length.

As illustrated on Slide 15, our calendar year 2012 approximately 95% of our average capacity is contracted with third parties. As contracts roll off and we add incremental storage capacity, this percentage changes. The comparable percentages for 2013 and 2014 are approximately 70% and 50% respectively. In each case, without taking into account new contracts that we intend to enter into in the future, but including incremental storage capacity we expect to place into service.

In conclusion, although we continue to face challenging market conditions, we believe PNG’s strategically located and operationally flexible assets, supportive parent, attractive contract portfolio, solid capital structure, and low-cost expansion projects position PNG very well relative to its peers.

With that, I’ll turn it over to Al.

Al Swanson

Thanks, Dean. Our financing activity since the last conference call consisted of our continued equity offering program and the renewal and extension of certain of our credit facilities. We implemented the continuous equity offering program in May. Through June 30, 2012, we raised $114 million of equity capital including the general partner’s matching contribution by selling approximately 1.4 million common units.

Additionally, in late June, we amended our hedged inventory facility, increasing the size from $850 million to $1.4 billion and extending the maturity to August 2014. This expansion more than replaces the $500 million of three-year senior notes maturing in September 2012 that we issued in 2009 to supplement our hedged inventory portfolio. Furthermore, the increased size and amended terms of the facility will also serve to support our expanded Canadian NGL activities related to the BP NGL acquisition and enhance our ability to utilize our storage and related assets to capitalize on market opportunities in the crude oil sector.

As illustrated on Slide 16, PAA ended the second quarter of 2012 with strong capitalization, credit metrics that are favorable to our target, and approximately $2.8 million of committed liquidity. At June 30, 2012, PAA’s long term debt-to-total capitalization ratio was 47%. Total debt-to-capitalization ratio was 51%. Long-term debt to adjusted EBITDA ratio was 3.1 times, and our adjusted EBITDA to interest coverage ratio was 7 times.

Our total debt ratio included $1 billion of short-term debt that primarily supports our hedged inventory. This debt is essentially self-liquidating from the cash proceeds when we sell the inventory.

For reference, our short-term hedged inventory at June 30, consisted of approximately 23 million barrels equivalent, with an aggregate value of approximately $1.16 billion. These amounts do not include approximately 19 million barrels equivalent of lime fill and base gas in PAA's, and third parties pipelines and terminals, that are classified as a long-term asset on our balance sheet, with a book value of approximately $900 million, and a market value of over $1.1 billion.

Moving on to PAA's guidance for the third quarter and full year 2012; the high points of which are summarized on Slide 17. For more detailed information, please refer to our guidance, 8K, that we furnished last night. We are forecasting mid-point adjusted EBITDA, adjusted net income, and adjusted net income per diluted unit, for the third quarter of 2012 of $412 million, $240 million, and $0.99, respectively. Including the benefit of the second quarter 2012 over performance. In our updated forecast for the second half of the year, we are forecasting 2012 mid-point adjusted EBITDA, adjusted net income and adjusted net income per diluted unit of $1.88 billion, $1.19 billion, and $5.42, respectively.

Our updated second half guidance is 2% higher than the second half guidance we provided in May. It reflects an expectation for less favorable crude oil market conditions, than those experienced during the first half of the year, and less favorable NGL market conditions, than we previously forecast. As you would expect, our full year guidance includes some refinement with respect to segment contributions and timing, as a result of recent acquisitions. Particularly the BP NGL Acquisition. As represented on Slide 18, PAA has continued to deliver solid distribution growth, and coverage. Giving effect to our recent financing activities, based on the mid-point of our 2012 guidance for distributable cash-flow, or DCF, in our targeted LP distributions.

Our distribution coverage is forecast to be approximately 140%, and we would retain approximately $385 million of excess DCF, or equity capital. Before I turn the call over to Greg, I wanted to make a few comments related to our credit ratings. For a number of years, our financial growth strategy has targeted an objective of achieving and maintaining mid to high BBB credit ratings. We were very pleased to receive an upgrade from S&P on May 30, from BBB- to BBB. Our credit rating with Moody's is comparable at BAA 2, and the outlook at both agencies is stable. We remain committed to continued improvement in our credit ratings, and intend to continue to prudently manage our capital structure and credit profile to achieve this important objective. With that, I'll turn the call over to Greg.

Greg L. Armstrong

Thanks Al. The second quarter was clearly a very productive period for the partnership. As recapped on Slide 19, PAA delivered very strong performance for the second quarter 2012, increased its guidance for the full year 2012, and added several attractive projects to our capital program. We believe that we are well positioned to continue to perform well throughout the balance of the year, and to accomplish our 2012 goals. Including year-over-year distribution growth of 8%-9%.

It's worth noting that since our last conference call in early May, crude oil prices fell by over 20%, to $77.00 a barrel, before recovering to their current level of around $90.00 per barrel. NGL price has also weakened materially, both in absolute and relative terms. Our guidance for the third and fourth quarters of 2012 incorporates our view of how these lower prices will impact PAA during the second half of 2012. Including our view of market conditions may not be as favorable in the second half of 2012, as they were in the first half.

As a business builder with a long-term view, we don't have to be spot on in the short-term, just right about the long-term fundamentals. With that thought in mind, our long-term outlook is for continuation of strong industry fundamentals, with regard to drilling activity, production (inaudible) both in the U.S. and Canada. We believe our assets are strategically positioned relative to this outlook. However, in order [inaudible] prepared fluctuations in industry conditions, we will continue to maintain significant financial flexibility, and reasonable distribution growth and coverage. Doing so will allow us to be patient, and yet deliberate in our pursuit of strategic opportunities.

For those reasons, we believe PAA is well positioned to continue to deliver attractive results. Specifically, over the next several years we expect to continue to realize the contributions from the $1.9 billion of capital we invested in 2011, and the $2.8 billion that we've already invested, or expect to currently invest in 2012 and beyond. As always, we will remain focused on prudently financing our growth, while maintaining a solid capital structure and a high level of liquidity. Before opening up the call for questions, I would mention that PAA and PNG held an analyst and investor meeting on May 30, 2012.

The meeting was well attended, with over 200 investors or analysts participating in the meeting in Houston, or over the Internet. For those that did not participate, a copy of the Slide deck and web-cast for the analyst meeting are available at our website www.paalp.com, under the investor relations and partnership presentations tab. Once again, thank you for participating in today's call, and for your investment in PAA and PNG. We look forward to updating you on our activities at our third quarter results call in November. Operator, at this point, we're ready to open the call up for questions.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions) We'll take our first question in queue, from the line of Darren Horowitz, with Raymond James. Please go ahead.

Darren Horowitz - Raymond James

Good morning, guys.

Greg L. Armstrong

Hey Darren.

Darren Horowitz - Raymond James

Greg, two quick questions from me. The first, as it relates to the Permian. I just wanted to get an update on your thoughts regarding production growth versus pipeline take away capacity, specifically in light of some recent pipeline announcements that we've heard. I'm more focused on if we think the Permian could have another 800 thousand or almost 1 million barrels of production growth over the next couple of years.

Do you think that a 200 thousand barrel a day gathering expansion that you talked about, feeding Mesa, the Longhorn line ramping up, and the potential for that new bridge text line. Do you think that's enough to keep the market balanced?

Greg L. Armstrong

You know, Darren, I think what's going on in the Permian is going to be more of a marathon than a sprint. It's going to take several years for some of these production profiles, and also the take away capacity to develop. I think candidly, we're going to go through periods where we have excess production relative to take away capacity. We'll run through periods where we'll have excess take away capacity relative to production as these new mid-stream projects come on stream.

Then, ultimately, we may shift back into a shortage of take away capacity, just dependent upon how the next generation pipelines and take away capacity is developed. In the Permian, just to kind of put it in perspective, I think we hit a low in the Permian, and I'm talking about both New Mexico and Texas; of probably around 750 thousand barrels a day, not too many years ago. Currently, we're running, Harry, what? Around 1.1 or 1.2 million barrels.

Harry Pefanis

Right.

Greg L. Armstrong

Our forecast for 2017-2017, that time period there, probably has us fairly comfortably going into the million-6 to million-7. They're certainly numbers that are forecast to be high, and if I take your 800 thousand barrels and add to current, that would push up close to 2 million barrels. So I don't think there's enough on the drawing board today to support the 2 million barrels. I do think there's probably enough on the drawing board today, to support the 1.6 to 1.7, but we still have about 3 or 4 years to go, to get there. Again, I think we may go through periods of oversupplied and under supplied with respect to take away capacity during the next 3 or 4 years. Then, it's a little bit fuzzy as you get further out. Harry, do you want to add anything?

Harry Pefanis

When you sort of look at the gathering capacity, we've got a line in New Mexico, that we recently acquired. It's connecting into the Basin system at [Shale]. That is going to add some capacity. We've got a couple of other projects, where, as production develops, we think we've got infrastructure and right of way in place, where we can expand gathering capacity. As you could imagine, we're looking to take away capacity out of the basin as well.

Greg L. Armstrong

Yeah, I think it's fair, Darren, in addition to the announced projects, you might assume that there's some shadow projects out there still, they're basically positioning to address the longer-term issues that you've identified.

Darren Horowitz - Raymond James

Yeah. I appreciate the color. Then, last question Greg. With regard to the second half of this years’ guidance, reflecting as you quoted less favorable market conditions. If we back out the conservative outlook on natural gas liquids, within the S&L segment. Is it more a function of tighter regional pricing arbitrage opportunity, like that Midland to Cushing differential that Harry mentioned, or is it more narrowing of grade quality differentials?

Harry Pefanis

Midland to Cushing, if you look at sort of, the run rate we had, that we expected at the beginning of the year, and the Midland to Cushing differential was probably the big blowout for the quarter. The other differentials, you see a lot of volatility. There could be some upsides in some of the grade, but there might be a little down side as well. I would say the Midland to Cushing differential that we experienced in the late first quarter, and through the second quarter was probably the largest driver deal for performance in the first half of the year.

Greg L. Armstrong

Yeah. Then I would add to that, as always, Darren, is that weather patterns in the fourth quarter, versus the first quarter of next year, will cause NGL deliveries to vary. So, if we have high withdrawals from inventory in the fourth quarter, well there's probably a little bit more of an upside to the forecast. But, if we don't have it, it really just shifts over to the first quarter of next year. So that's not so much of a swing [inaudible] just trying to project the timing. I think the biggest contributor to second quarter versus our outlook for the second half of the year was the Mid/Cush differential.

Darren Horowitz - Raymond James

Sure. All right, I appreciate it. Thanks guys.

Greg L. Armstrong

Thank you Darren.

Operator

Thank you. Our next question in queue will come from Brian Zarahn, with Barclays. Please go ahead.

Brian Zarahn - Barclays

Good morning.

Harry Pefanis

Good morning, Brian. Can you give a little more color on the Eagle Ford JV with Enterprise. You joined into a lot of JVs with other MLPs. Or I guess first, when did you begin discussions on this project, and did you see more opportunities with Enterprise in the crude oil business?

Greg L. Armstrong

We've been in discussion with Enterprise for probably three or four months on this. Clearly, any time there's such a wave of new construction in an area that's developing this fast, part of the challenge between both the producers and the mid-stream companies is to calibration the actual midstream capacity necessary to meet the needs. In this particular case, we discovered that there was probably an over-supply of pipelines being built to the Eagle Ford. Issues come up about not only excess take away capacity, but what's the right rate to charge.

Joining with Enterprise, we both found a better use for both of our capitals. A capital to basically optimize the return and still meet all the needs of the different producers that we have and the commitments on that. So, to answer your question it's been three or four months. As far as, and you're right we don't do a lot of joint ventures, but Enterprise is clearly one of the top contenders for anything we might think about doing in a JV. So we found them very good to deal with, and we're interested in exploring other opportunities.

Again, we probably prefer to do it all ourselves always, but in an area where it makes sense, we certainly would open up to joint ventures, as we did here.

Harry Pefanis

Just to give you an idea, if you look at that Gardendale area, with Enterprise had a project to go from Gardendale to Lyssy. If you would have layered their project on top of the other pipeline projects being developed by the same area, you would have been a million and one a day in total. I don't think anyone has an expectation to see anywhere close to that volume coming out of that portion of the Eagle Ford.

So, on a consolidated basis, we still have 800,000 barrels a day of capacity from that portion of the Eagle Ford, into the Three Rivers area. They can split up and go north to the pipelines going to Houston and south, to the pipelines going to the Corpus Christi area.

Greg L. Armstrong

By consolidating that part of the project and the economies of scale that go along with it, we think we're able to have probably, as Harry mentioned in his comments, the most competitive transportation rate for that incremental barrel coming out of Gardendale.

Brian Zarahn - Barclays

In terms of the remaining capacity, do you expect to have that contracted, or are you going to leave that open for spot shippers?

Harry Pefanis

We're pretty flexible. We certainly have a lot of gathering activities, as you know, in Velocity. The assets we bought from Velocity in what we call the Gardendale gathering system expansion. So, we expect to feed a lot of our own pipeline there.

Greg L. Armstrong

I think what's happened is, there's still more capacity coming out of Gardendale area, than there is production. That might not always be the case, but it certainly is today. So, it's a lot harder to get commitments once the pipelines are built. So you've got enough pipeline capacity being developed, we would love to have commitments, but it's just harder to get commitments after the pipeline is already in service, or committed to be developed.

Brian Zarahn - Barclays

Last question from me. As we get closer to year, do you think 2013 organic spending could be similar to 2012 levels?

Greg L. Armstrong

We've been saying for a while that we think it has an upward bias to what we previously announced was around 650 to 800 million. So we continue to have that same upward bias. The short answer to your question is it's likely probably going to approach $800 to a billion range.

Brian Zarahn - Barclays

Thanks, Greg.

Greg L. Armstrong

Thank you.

Operator

Thank you very much. Our next question in queue will come from the line of Ted Durbin, with Goldman Sachs. Please go ahead.

Ted Durbin - Goldman Sachs

Thanks. I'm wondering if you can give us an update in a little more detail on the BP assets that you bought, kind of what you're seeing on volumes and margins. I think you mentioned about some refinements you made to the forecasts, some of the changes there, how you're doing getting third party volumes, kind of go through those assets.

Greg L. Armstrong

Ted, we're pretty much as Harry Pefanis's Slide indicated, pretty much on track with respect to the integration part of it. The two aspects that will take a number of years, are the realization of all the commercial synergies, and then some of the IT system will continue to stretch into next year, just because it just takes longer for those things. But, overall we're pretty much on track with where we ought to be. I would say our volumes are pretty much in line with what we would have expected at this point in time.

The one issue, and Harry mentioned in his comments, that because of the difference of when you put NGL into inventory, when you take it out, there's some inventory costing time issues, and that's what I mentioned earlier is if we see a big draw in inventory in the fourth quarter, then we'll probably have some upside to our bias, but we refined that a little bit, to allow some of those draws to carry over into first quarter of next year, just because it's weather related.

Harry Pefanis

As far as, sort of changing the business strategy from solely merchant to a business that is more a fee-based business, the NGL season is a lot like natural gas where it's April 1st to March 31st the following year, so don't expect to convert much of that to your fee base this season. A lot of the positions were put on by BP, because they owned the assets through the first quarter 2012. So that's sort of a dynamic that will change, as we look at the next season for 2013 and 2014.

Greg L. Armstrong

What we had done Ted, is we have, as we indicated, we pretty much, unlike BP which may keep inventory and not have it sold. We've hedged our inventory position so we're not exposed to the price fluctuations that we have now. As Harry, said, and if you go back in our conference call comments; we said it would take us about three years to totally convert their system into the way we would like to manage it. That's not only the business model conversion, but also part of the challenge is trying to take assets that were storage assets in Canada, that were existing storage, but not in service and trying to put it back in service. So we're getting permission to create brine ponds, so we can actually use the caverns that we have available. We're pretty excited about what that long-term view looks like, especially in the Sarnia area, as well as others, for converting those caverns into active use. Whether that be crude oil or NGL.

Ted Durbin - Goldman Sachs

That's actually very helpful. Thank you. Then, the other one from me, is just kind of thinking about the Yorktown facility here. It was unclear to me if you actually have contracts on the terminal you're building there. Then maybe extending that, it sounds like we may not be shutting down as much east coast for [inaudible] capacity is what we had assumed. I'm wondering how you think about that impact on some of the assets on the east coast for you?

Harry Pefanis

Your count, we do have part of the facility, at least for now. We've got a lot of work going on to refurbish tanks, get the docs in place, get the rail facility the way we want. So, it's not totally utilized, right now, we expect long-term, that a lot of the assets will be used on a fee basis, and we think we'll move some of the product into Yorktown and some of the crude into Yorktown, as well. So we've used both for crude, and products. We think the higher utilization of finding capacity in the east coast, helps Yorktown. We're set up to move two unit trains a day in of crude, and we think both the east coast and west coast are sort of natural locations for some of that extra light sweet crude that's being developed in the U.S.

Greg L. Armstrong

I think it's fair to say, Ted, part of what we're doing and I think Sunoco and others are doing is you're basically bringing attractive crude from domestic sources to the east coast, that will probably cause the refiners to be able to stay in business longer.

Ted Durbin - Goldman Sachs

Fair enough. Those are my questions, thank you.

Greg L. Armstrong

Thanks Ted.

Operator

Thank you very much. (Operator Instructions) Our next question will come from Michael Blum, with Wells Fargo. Please go ahead.

Michael Blum - Wells Fargo

Thanks. Just one follow up on the BP assets, I guess just to clarify. Given the reduction in NGL prices that we've seen, do you still expect to be within that EBITDA range that you provided when you bought the asset?

Greg L. Armstrong

Yeah, we provided a neighborhood roughly of about $200 million. Michael, we had anticipated when we ran our numbers, obviously strong and weak price forecasts, and overall even if we stayed in this lower price forecast for the future, with the activation of the other assets, earning up, we still feel pretty good about our $200 million neighborhood.

Michael Blum - Wells Fargo

Okay. If I rolled forward two years, and you converted, after you've converted more of this business to fee based. How would that number change? Would it go up, or down, or stay the same? Assuming the same price is buying it.

Greg L. Armstrong

I would probably say it's going to be in the same neighborhood, maybe a little bit better than what it is right now. By the way, just to be clear; we may not be above or below that $200 million, or right on the $200 million all the time. Nothing has changed in terms of how we value the acquisition, meaningfully, at all.

The fact is, if anything we're probably more excited about upside. It's just hard to have a crystal ball and say "What's the market going to be three years from now? What's it going to do for demand for services." If you could tell me what it's going to do to drilling in the Marcellus area and some of the Utica Shale, I could probably answer your question. I would say we still feel very good about the neighborhood of EBITDA that we used to base our price forecast on, with upside to that.

Michael Blum - Wells Fargo

Okay. Thank you, Greg.

Greg L. Armstrong

Thank you.

Operator

Thank you. Our next question in queue will come from the line of Ross Payne with Wells Fargo. Please go ahead.

Ross Payne - Wells Fargo

I've had my questions answered. Thank you, guys.

Greg L. Armstrong

Thanks Ross.

Operator

Thank you. (Operator Instructions) Selman Akyol, with Stifel Nicolaus. Please go ahead.

Selman Akyol - Stifel Nicolaus

Thank you, good morning.

Greg L. Armstrong

Good morning, Selman.

Selman Akyol - Stifel Nicolaus

Just a quick question on natural gas. I guess someone should ask a question. In terms of the caverns 4 and 5. Can you talk about how those are leasing up, and sort of where they are and what rate environment you're seeing?

Harry Pefanis

Well, as far as leased out, Selman, at Southern Pines we're sold out. So, Cavern 4 is completely committed. Cavern 5 at Pine Prairie, for 2012, most of that capacity we showed is done, and what little bit was left, we took and are managing ourselves. As you shape up and look forward into 2013, we're currently working with customers to sell the space in 2013, as we would at this time of the year and as we move forward in the year. So, from a rates, I'll take the usual stance, we don't comment on those. As far as market conditions haven't changed from what they were earlier in the year, as far as long-term rates, I think we're very close to, in my opinion, bouncing off the bottom. I think there's upside from this point on, but fairly consistent with what we've seen in recent contracting periods.

Greg L. Armstrong

As Dave's comments on his part of the call, we're preparing ourselves "bounce off the bottom" in the next two years. It's just going to be hard to say that there's going to be a dramatic recovery near-term. If it happens we're pretty well positioned for it, if not, we're pretty well positioned as well.

`

Selman Akyol - Stifel Nicolaus

All right. Thank you very much.

Operator

Thank you. At this time, there are no additional questions in queue. You may continue.

Greg L. Armstrong

If there are no additional questions, we'll go ahead and conclude the call. Again, we want to thank everybody for dialing in and for your investment and trust in PAA and PNG and we look forward to updating you on our call in November. Thank you.

Operator

Thank you very much. Ladies and gentlemen this does conclude your conference today. We thank you for your participation and for using AT&Ts Executive Teleconference.

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