Plains All American Pipeline LP (PAA) 2008 Q1 法說會逐字稿

Welcome to the Plains All American Pipeline's First Quarter 2008 Results Conference Call. During today's call the participants will provide forward-looking comments on the Partnership's outlook, as well as review the results of the prior period.

Accordingly in doing so they will use words such as believe, estimate, expect, anticipate, etcetera. The Partnership intends to avail itself of Safe Harbor provisions that encourage companies to provide this information and directs you to the risks and warnings set forth in Plains All American Pipeline's most recently filed 10-K, 10-Q, 8-K, and other current and future filings with the Securities & Exchange Commission.

In addition, the Partnership encourages you to visit its website at www.paalp.com. In particular the section entitled Non-GAAP Reconciliation, which presents certain commonly used non-GAAP financial measures such as EBITDA and EBIT, which may be used here today in the prepared remarks or in the Q&A session.

This section also presents a reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures and include the table of selected items that impact comparability with respect to the Partnership's reported financial information. Any reference during today's call to adjusted EBITDA, adjusted net income, and the like is a reference to the financial measure including the effect of selected items impacting comparability.

Today's conference call will be chaired by Greg L. Armstrong, Chairman and CEO of Plains All American Pipeline. Also participating in the call are Harry Pefanis, Plains All American's President and COO; and Phil Kramer, Plains All American's Executive Vice President and CFO.

I will now turn the call over to Mr. Greg Armstrong. Please go ahead.

Thanks, Diego, and good morning and welcome to everyone. As a reminder the slide presentation accompanying this call is available on our website at www.paalp.com.

Yesterday, Plains All American reported solid operating and financial results for the first quarter of 2008 with all three segments performing inline with or ahead of the midpoint of public guidance. As summarized on slide 3, net income for the quarter was $92 million or $0.57 per diluted unit and adjusted EBITDA was--totaled $191 million.

On a comparative quarter basis, market conditions in the first quarter of 2007 were very favorable as the crude oil market was in a fairly pronounced contango structure. The crude oil market transition and the backwardation the second half of last year which led us to believe that first quarter 2008 results would be closer to what we refer to as baseline performance. As expected, adjusted EBITDA for the current quarter was approximately 5% below the first quarter of 2007, and conversely on a sequential basis adjusted EBITDA for the first quarter of 2008 was approximately 14% higher than the fourth quarter of 2007 as the fourth quarter was adversely affected by the shift in market structure and related transition factors. In summary, we delivered very solid results in a backwardated market and these results rebounded strongly over fourth quarter 2007 results.

As shown on slide 4, we have now delivered performance inline with our public guidance for a period that extends over six years. The first quarter results are also significant in that this was the first opportunity in some time for PAA to demonstrate that we can deliver solid baseline performance in a backwardated market.

Yesterday we also provided guidance for the second quarter of 2008, which Harry and Phil will address in more detail later in the call. Due to the timing of -- certainly around the closing of the Rainbow Pipeline acquisition and restrictions placed upon us by our confidentially agreements with the sellers, this guidance excludes the impact of the acquisition on both our capital structure and our operating results. The closing of Rainbow is currently targeted for the latter half of the second quarter but is subject to regulatory approvals and other customary closing conditions.

We intend to provide updated guidance for the second half of 2008 on or before our second quarter conference call to be held in late July, early August. The specific timing of the guidance update will dependent upon the timing of the Rainbow closing. Once we have closed the Rainbow transaction we will update our guidance to not only include the impact of this acquisition but also other modifications related to our outlook on market conditions, timing considerations of existing capital projects, and any additional capital projects that may materialize in the interim. To the extent the transaction closes near the end of May or early June as anticipated, we would expect to update our guidance via Form 8-K shortly thereafter.

I have just a few more items I want to address before turning the call over to Harry and Phil to address the quarter results and financial matters.

Two weeks ago we issued an announcement increasing our quarterly distribution to $0.865 per unit, which is $3.46 per unit on an annualized basis, representing an increase of approximately 6.5% over May 2007 distribution, and an increase of 1.8% over the February 2008 distribution of $0.85 per unit. This increase is inline with the midpoint of our long-term guidance range excluding the impact of significant acquisitions. This action also constitutes the 16th consecutive increase in quarterly distributions for the Partnership and the 23rd increase in the last 29 quarters.

As we have highlighted in previous calls, when we make significant acquisitions, we have the ability to achieve and exceed the high-end of our distribution growth targets. That said, although the transaction -- Rainbow transaction's not as large as the $2.5 billion Pacific transaction, it is certainly larger than the $200 to $300 million average that we target on an annual basis. Accordingly, we also announced our intent to increase our distribution growth for -- distribution goal for 2008 by $0.05 per limited partner unit effective upon completion of the Rainbow Pipeline acquisition.

At the beginning of the year, the Partnership set a goal of increasing its year-over-year distributions in 2008 by $0.20 to $0.25 per unit. Based on the 2007 distribution exit rate of $3.36 per unit, our original goal equates to an annualized distribution level in November 2008 of $3.56 to $3.61 per unit. Following the closing of the Rainbow transaction, we intend to raise our goal to increase distributions by approximately $0.25 to $0.30 per unit, which would equate to an annualized distribution level of $3.61 to $3.66 per unit in November 2008. The new distribution goal would represent a year-over-year targeted increase of approximately 7.4% to 8.9% as compared to the current goal of 6% to 7.4%.

As we mentioned in the press release announcing the transaction, we expect to realize synergies within the first six months and substantially all of the anticipated near-term synergies within 18 months of closing. In recognition of the six -- the 18-month synergy phase-in period, the owners of our general partner have agreed to reduce the incentive distributions otherwise payable for the six-quarter period following closing of the Rainbow acquisition. The incentive distributions otherwise payable to the owners of our GP will be reduced by $2.5 million for each of the first two full quarters following the closing and $1.25 million for each of the four quarters thereafter.

These reductions are designed to enable the Partnership to accelerate the benefits of the transaction to the limited partners while increasing the overall distribution coverage ratio during the synergy phase-in period. We believe this action by the owners of our general partner once again demonstrates their flexibility and commitment to facilitate the Partnership's growth.

Although it is still early in the year, we believe PAA is off to a solid start; and we are on track to achieve our 2008 goals and well positioned to remain very active throughout the remainder of 2008. With that I will turn the call over to Harry.

Thanks, Greg. During my portion of the call, I will review our first quarter operating results compared to the midpoint of our guidance, discuss progress on our capital projects, and I'll briefly discuss our pending Rainbow acquisition.

As shown on slide 5, adjusted segment profit for our transportation segment was $92 million or $0.37 per barrel. It was at the high-end of our guidance. Total volumes within the segment were inline with our guidance at 2.8 million barrels per day. Adjusted segment profits for the facility segment was inline with guidance at $32 million or $0.23 per barrel. Our facilities volumes were 47 million barrels per month, which was slightly below the 49 million barrels in our guidance.

This variance was due to the expansion tankage at St. James and Fort Laramie that was forecasted to be in service in the first quarter and slipped into April. Adjusted segment profit for the marketing segment was $66 million or $0.79 per barrel which both were a bit higher than the midpoint of our guidance. Buy ins of 910,000 barrels per day were inline with our guidance.

Maintenance capital was $20 million for the quarter, and as we mentioned in last year's call, this amount included costs of [slip] from 2007 to 2008. We continue to expect maintenance costs for this year to be approximately $60 million. However, on an ongoing basis we expect maintenance capital for our existing asset base to range between $50 million and $55 million a year.

Operational assumptions used to generate our guidance for the second quarter include anticipated buy ins in the transportation segment of approximately 2.8 million barrels per day which is inline with our current volumes. Forecasted volumes in our major pipelines are shown on slide 6 and are detailed in our 8-K guidance, which was furnished last night. Segment profit midpoint is $92 million and is inline with our first quarter results. For all three segments references to segment profit excludes selected items impacting comparability.

Second quarter facility segment guidance is based on forecasted buy ins of 47 million barrels per month of crude oil, refined product, and LPG storage, 13 BCF per month of natural gas storage, and 20,000 barrels per day of LPG processing throughput capacity and that totals 50 million barrels per month of capacity.

The majority of these increase -- of the increase of buy ins over the last quarter is represented by the full period impact of the 2 million barrels of additional storage capacity at our St. James Terminal, which came into service late first quarter, first part of second quarter, and additional capacity at Cushing in Fort Laramie.

Marketing segment guidance for the quarter includes forecasted lease gathering buy ins of approximately 685,000 barrels per day, LPG sales of 66,000 barrels per day, refined products sales of 20,000 barrels per day, and foreign cargo buy ins of 74,000 barrels per day, for total buy ins of 845,000 barrels per day. These volumes except for LPG sales volumes that are seasonal are inline with our first quarter volumes. The segment of profit midpoint for the marketing segment is $63 million or $0.81 per barrel.

Slide 7 shows our 2008 capital program and that's been increased by $50 million to account for an increase of the projected costs on our Salt Lake City pipeline expansion project. As a result of a combination of inclement weather, right-of-way and permitting issues, as well as adverse soil conditions, we now expect the Salt Lake City expansion to cost approximately $160 million. And after taking into account (inaudible) $26 million joint venture payment, the total cost to PAA is now expected to be approximately $134 million. We expect completion of the pipeline to occur in the third quarter. Slide 8 shows the total cost and expected in service tithing for some of our larger 2007 carryover projects and our 2008 projects.

Generally our projects are advancing as expected. Some of the specifics, on the west coast during the first quarter, we completed the final 150,000 barrels of our 850,000-barrel Martinas expansion and are progressing as planned on our [West Heims] facility. At our St. James Terminal as I had previously mentioned, we recently placed into service 2 million barrels of the 2.7 million barrel Phase II expansion. Of the remaining 700,000 --barrels will be assessed for conversion to handle lighter materials that Capline has recently announced that it will accept. This tankage will be placed in service in the second half of 2009.

Our tankage at Potoka's on target to be in service in the third quarter this year, and demand for this capacity remains high. And as we mentioned during our analyst meeting, we are evaluating the merits of a Phase II expansion of this facility.

With respect to our Pier 400 project, we believe that the recent settlement of the [trade back]environmental review, and I'll refer to that as the EIR, is a positive event that we believe cleared the way for the release of our draft EIR. That we've been working closely with the Port, and we're hopeful that the EIR will be released this quarter.

On our PA/Vulcan/Pine Prairie Project, we stopped leeching cavern well one with approximately 5 BCF of storage capacity at the end of February. We've begun testing and the permitting process on this capacity, and contingent upon receiving the available state and federal permits, or the [appropriate] state and federal permits, we expect this storage capacity to be in service later this year. We've begun leeching operations on cavern well two and that should result in approximately 8 BCF of additional storage capacity being placed into service next year.

A few weeks ago, as Greg mentioned, we announced the acquisition of the Rainbow Pipeline for a total consideration of $540 million, Canadian dollars, plus the market value of 1.1 million barrels of line fill at the time of closing. We've not yet closed on the asset; and as Greg mentioned, we're subject to confidentiality agreement so we're limited in the amount of information we can share today. So as shown on the map on slide 9, the Rainbow system represents a significant extension of our Canadian footprint; and also described on slide 10, Rainbow's a good strategic fit with our current operations. The acquisition will compliment our existing asset base and will increase the contribution to segment profit from fee based pipeline assets.

Rainbow is located in a significant oil resource area with strong growth characteristics. As a result we believe Rainbow will offer us potential expansion opportunities. Rainbow also offers long-term option with respect to transporting [condisay vines] associated with potential future development of natural gas resources located in the McKenzie Delta and Beaufort Sea.

As Greg mentioned, we anticipate substantially integrating the Rainbow Pipeline system into our existing operations and realizing a meaningful amount of synergies within six months of closing. Substantially all of year term synergies are expected to realized within 18 months following closing, and we anticipate there will be additional synergies and capital investment opportunities for several years thereafter. Pending regulatory approval we expect to close on the -- on Rainbow in the later half of the second quarter.

With that I will now turn the call over to Phil.

Thanks, Harry. During my portion of the call, I'm going to discuss our capitalization, liquidity, our recent financing activities, and then guidance for the second quarter of this year.

As summarized on slide 11, we ended the first quarter of 2008 with strong capitalization liquidity and well within our targeted credit metrics. As noted previously and consistent with our financial growth strategy and our past practices, we essentially pre-funded the equity component of our 2008 expansion capital program with our equity offering in June of 2007. As a result as of March 31of this year, our long-term debt to cap metric is 44%, which is favorably below our target of 50%.

Our first quarter adjusted EBITDA to interest coverage multiple was 4.5 times in utilizing the annualized equivalent of the midpoint of our first half of 2008 adjusted EBITDA guidance. Our long-term debts or adjusted EBITDA ratio is 3.5 times. As noted in prior calls, container related interest costs are excluded from the interest coverage multiple as that interest is reflected in gross margin as a cost of a storage transaction.

Just under two weeks ago we accessed the long-term debt market issuing $600 million of ten-year senior notes. The 6.5% notes [where we saw a slight discount] and they yield 6.58%. Net proceeds from the offering were approximately $592 million and were used to reduce borrowings on our credit facilities. The transaction shores up the significant portion of the long-term debt financing associated with this year's capital program as well as a good portion of the funding for our pending Rainbow acquisition.

By completing the transaction prior to closing the Rain -- before closing the Rainbow acquisition, we also ensure that our liquidity remains intact. The transaction was favorably received based on demand and we are pleased with the support of the purchasers. Inclusing -- inclusive of this offering our long-term debt has an average tenure of approximately 13 years with over 97% of our long-term debt subject to fixed rate interest rates. The only maturity we have over the next four years is a relatively small $175 million tranche that matures in mid 2009.

Our short-term debt balance at the end of the first quarter which primarily represents borrowings to support our hedge crude oil and LPG inventory, as well as NYMEX and NYCE margin requirements was approximately $700 million and that's down about $260 million from our yearend balance. This reduction primarily reflects a seasonal reduction in our LPG inventory. At the end of the first quarter, we had approximately $2 billion of liquidity including approximately $1.2 billion under our committed revolver and approximately $800 million under our committed -- I'm sorry, our uncommitted hedged inventory facility.

As Greg mentioned in his introductory comments, yesterday we furnished guidance for the second quarter in a Form 8-K. We expect second quarter adjusted EBITDA to range from $180 million to $195 million, with adjusted net income ranging from $84 million to $104 million, and adjusted net income per diluted unit ranging from $0.50 to $0.66 per unit.

This guidance for the second quarter reflects a seasonal reduction in profitability from our LPG business and, as Harry mentioned, reflects our expectation of the continuation of current moderately backwardated market conditions. And that's as opposed to the more favorable contango market of -- market condition that we experienced during the second quarter of last year.

I would also mention that for those investors that are interested in our gross receipts, you can find an estimation of our first reporters contribution to 2008 gross receipts per unit under the gross receipts tab of the Investor Relations portion of our website. With that I'll turn the call back over to Greg.

Thanks, Phil. Since the middle of 2007, the equity market in general and the MLP market in particular have been very interesting to say the least. I cannot add much to the analysis and opinions provided by the research analysts about the technical reasons for these market conditions in the MLP sector, but what I can do is summarize for you PA's positioning in the current environment. Specifically I want to provide you with five takeaways from today's call and these are summarized on slide 13.

First, the fundamentals of PA's business are sound, and our assets and business model are performing inline with our baseline expectations. And our baseline is the basis upon which we establish our goals for distribution growth.

Second, although our cost and timing have been impacted by a few areas by weather, the impact is relatively minimal and the important measures of our organic capital expansion projects are on track.

Third, the acquisition market continues to be very active.

Fourth, we believe PA's strong financial position, high level of liquidity, and our ability to access the capital markets to fund incremental opportunities position us to be able to capitalize on attractive opportunities as they come along.

Fifth and finally, we believe the combination of PA's current yield, the distribution growth outlook supported by our organic growth projects, and the optionality associated with our demonstrated ability to make value added acquisitions provide an attractive investment opportunity.

We thank you for your continued interest and support of Plains All American; and, Diego, at this point in time we'd be ready to take any questions.

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. (Operator Instructions). Our first question comes from Brian [Zuran] with Lehman Brothers. Please state your question.

Good morning.

Good morning, Brian.

Are you still comfortable with distribution coverage of roughly 1.05?

We are. We basically have indicated that on our baseline level, Brian, that's certainly true. If we end up with more favorable market conditions, that number will trend upwards; but again we don't use that when we calculate our baseline distributable.

Thank you.

(Operator Instructions). We will pause for a few moments to pool for questions. Our next question comes from Xin Liu with JPMorgan. Please state your question.

Good morning. My question is regarding Capline. There is some rather sharper decline than we expected. Can you explain what's going on there?

Sure. Harry, you want to field that?

Yes. Capline has some seasonal -- seasonality to it just because refiners go into turnaround specifically serving just a couple of refineries. So -- but that's really what we saw in the first quarter. Second quarter volumes are back up to where they've been running over the past year or so.

Yes. I think Xin we're projecting the midpoint on the volumes for Capline for the second quarter to be right at 225 a day.

Okay. Another question regarding Pier 400. What kind of cost inflation protection are you visiting for that project?

Our most recent, I don't have the exact number in front of me, but I think we've got it -- it's around $450 million is what we're estimating the project is at. We do have -- if your question is do we have cost protection under our contracts with the customers, and the answer is by and large "yes". It's not 100%, but we're protected I think, Harry, for about 80% or so of the price increase.

Right.

So I'd say it's a very attractive position to be in in this environment.

And can you give us a roughly return number?

It's going to be certainly consistent with the expectation we have for other projects, which is the multiple range we give there is roughly the six to eight multiple range. That's going to put you in the mid to high teens dependent upon -- well, basically the mid to high teens.

Okay. And with environmental global support for the -- a key rate for your -- for paying, would you see any benefit on your California system?

That -- most of that volume's going to go directly to the Santa Maria refinery that Conoco has. So you could see some of our volumes that currently move to Santa Maria move little farther east on the All American system so the tariff's a little higher. If those volumes move south, yes the Pacific system will get the benefit of those additional Breckenridge volumes. If they move north, then we wouldn't see any. So I said not a whole lot. I should have probably said we have the chance to have some additional volumes on the Pacific system.

Okay, thank you.

Our next question comes Ethan Bellamy with Lehman Brothers. Please state your question.

Hi, guys. Are you actively looking to consolidate in the MLP space?

Ethan, great question. We maintain ever vigilance on looking for good opportunities and we think MLP consolidations are certainly the way to go as being one of those avenues. The -- yes, there's only been about five MLP consolidations so far. We've actually participated in two of those, and so we do think that there's a possibility going forward that the increase in the number of MLPs which has gone from probably 15 when we went public in '98 to north of 70 today. We'll contract some, and we think we're going to try to position our self to where it makes sense to participate in that.

Thanks, Greg.

Thank you.

(Operator Instructions). We will pause for a few moments to pool for questions. Our next question comes from Sean Maher with Morgan Stanley. Please state your question.

Hi, good morning, guys. I wonder if you could talk about the margin expansion opportunities that you actually have on your existing asset base. We talked about growth a lot, but particularly in Cushing when you compare the relative age and quality of your asset base versus your peers and increased reliance for foreign source crude, how do you think about that going forward in terms of being able to realize greater incremental margin off of your existing asset base?

Harry, you want to take the first shot at that?

Yes, I mean--I think we're starting to see our storage tankage in Cushing get a little higher value than historically. The combination of newer facilities, the pipeline connections that we have, that'll somewhat be tempered by the fact that there's been a fair amount of new construction in Cushing over the last -- over the last few years. So I would expect that we'd probably continue to see slight increases in our margins at Cushing.

Yes. I would say, Sean, overall the -- I think you're correct. There's been an upward pressure on the value of the service that's provided by tanks especially on the east and west coast and to some extent on the Gulf Coast simply because there's been an absorption of a lot regulatory imposed costs for awhile; and as leases come up for renewal, there's a need to pass those costs on. And so given the fact that we've got the historical cost in our P&L going forward you'd see the catch-up if you will in the margin side of it. So I certainly think we're in the -- on the right side of that equation.

Okay, great. Thank you.

Thank you.

There are no further questions at this time. I will turn the conference back to management for closing comments.

I want to thank everybody for participating in the call today and for those that later on dial in to the webcast. We understand this is a very active earnings release period and we appreciate your time and focus and dedication to Plains All American. We look forward to speaking to you at the end of the second quarter. Thanks.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.