Plains All American Pipeline LP (PAA) 2015 Q2 法說會逐字稿

Welcome to the PAA and PAGP second-quarter results conference call.

(Operator Instructions)

I would now like to turn the conference over to your host, Ryan Smith, Director of Investor Relations. Please go ahead.

Thanks Kelsey.

Good morning and welcome to Plains All American Pipeline's second-quarter 2015 results conference call. The slide presentation for today's call is available under the investor relations section of our website at www.plainsallamerican.com.

During today's call we will provide forward-looking comments on PAA's outlook for the future. Important factors which could cause actual results to differ materially are included in our latest filings with the SEC.

Today's presentation will also include references to non-GAAP financial measures such as adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures can be found under the financial information tab of the investors relations section of our website.

Today's presentation will also include selected financial information of Plains GP Holdings or PAGP. We do not intend to cover PAGP's GAAP results separately from PAA's.

Instead we have included the schedule in the appendix to the slide presentation for today's call that reconciles PAGP's distributions received from PAA's general partner with the distributions paid to PAGP's shareholders and a condensed consolidating balance sheet. Today's call will be chaired by Greg Armstrong, Chairman and CEO.

Also participating on the call are Harry Pefanis, President and COO and Al Swanson, Executive Vice President and CFO. In addition to these gentlemen and myself we will have several other members of our senior Management team present and available for the question-and-answer session. With that, I will turn the call over to Greg.

Thanks, Ryan. Good morning and welcome to today's call. The last three months have been fairly eventful.

Since PAA's last quarterly earnings call on May 6, PAA experienced two unrelated incidents that led to crude oil releases, held its annual investor day, and also announced several organizational changes. Additionally oil prices have fluctuated and midstream equity valuations experienced significant downward pressure.

I will address the organizational changes, our thoughts on the impact of oil prices and equity market valuations as well as our current thoughts on distribution guidance in my closing remarks. Before we dive into the typical discussion of quarterly results, I want to first discuss the financial impacts of the two operating incidents.

Regarding the first of the two incidents, on May 19 we experienced a crude oil release on line 901 in Santa Barbara County. That resulted in a net $65 million contingency loss in PAA's reported but unadjusted second-quarter results.

This loss is comprised of a $257 million charge for actual and estimated total cost offset by an estimated $192 million insurance recovery. Our estimate of the contingency loss includes actual and projected emergency response and cleanup costs, natural resource damage, third and third party claim settlements, as well as estimates for fines, penalties, and certain legal fees.

Actual cost incurred for these items through June 30, 2015 totaled approximately $100 million, and the balance represents our current estimate of amounts to be incurred in the future. Obviously this is just an estimate and while it is based on what we believe to be a reasonable set of assumptions, our costs could vary from these estimates.

I would also like to note that our estimate of the contingency loss does not include lost revenues due to the continued shutdown of lines 901 and 903. We have taken lost revenues into account in our guidance for the balance of the year.

The net contingency loss of $65 million has been included as a selected item impacting comparability in our calculation of adjusted net income, adjusted EBITDA, and distributable cash flow. We will true up this net estimate as developments warrants and adjust the selected item amount accordingly.

As you might expect our 10-Q will contain additional information regarding our net contingency loss associated with this matter, including the discussion of the worst-case discharge calculation for the line 901 incident. The 10-Q will be filed later this week. However, to ensure everyone has the same information and thus minimize the chance of miscommunication, included in the appendix are slides setting forth the disclosures regarding line 901 that we anticipate will be included in the 10-Q when it is filed.

In July we experienced a failure of a compression fitting at an unmanned booster pump station in Illinois that also resulted in oil release. Although this event did not impact the second quarter, I wanted to share with you that we estimate the costs of response and cleanup for this incident will be less than $10 million, of which approximately $5 million will be reflected in PAA's third-quarter results and is reflected in our guidance.

We anticipate the balance will be covered by insurance. We sincerely regret the impact both of these unrelated incidents have had on the environment and wildlife and any disruption to the residents of and visitors to each of these areas.

Harry will provide some additional comments in his prepared remarks, but you should know that PAA is committed to being a good neighbor and restoring each of these areas to their pre-release conditions, and we are well on our way to achieving those goals. With those introductory comments let me now turn to our second-quarter results.

Yesterday PAA reported adjusted EBITDA for the second quarter of $486 million, which is approximately $26 million above the midpoint of our second quarter guidance range. Slide 3 contains comparisons of various performance metrics for the same quarter of last year, as well as our second-quarter 2015 guidance.

Slide 4 highlights that this is the 54th consecutive quarter PAA has delivered results in line with or above guidance. For the second quarter of 2015 PAA declared a distribution of $0.695 per limited partner unit or $2.78 per unit on an annualized basis, which will be paid next week.

This distribution represents a 7.8% increase over PAA's distribution paid in the same quarter last year and a 1.5% increase over PAA's distribution paid last quarter. Distribution coverage for the quarter on a stand-alone basis was 0.73 to 1 due partially to seasonality.

For the six months of the year distribution coverage was 0.93 to 1. PAA has now increased its distribution in 43 of the past 45 quarters and consecutively in each of the last 24 quarters.

PAGP declared a quarterly distribution of $0.227 per share which represents a 23.8% increase over the quarterly distribution for the same quarter last year, and a 2.3% increase over the distribution paid last quarter. I will have some additional comments on distribution growth and distribution coverage in my closing remarks.

With that, I will turn the call over to Harry to discuss our operating performance for the quarter and our ongoing growth activities.

Thanks, Greg.

During my portion of the call I will review our second-quarter operating results compared to the midpoint of our (technical difficulty), discuss the operational assumptions used to generate our third-quarter guidance, and provide an update to our 2015 capital program.

As shown on slide 5, adjusted segment profit for the transportation segment was $256 million, or approximately $8 million below the midpoint of our guidance. Tariff volumes of 4.5 million barrels per day were approximately 141,000 barrels per day below our guidance.

We had lower volumes in our Permian Basin gathering pipelines primarily due to a slight delay in the in-service date of new pipelines and connections. We had lower volumes on our Mesa pipeline due to an unplanned downtime with a connecting carrier, and lower volume on our California pipeline assets due to both the line 901 incident and refinery issues in the Los Angeles area.

Partially offsetting the impact of lower than forecasted volume was lower operating costs. A portion of lower operating costs was volume-related. However, the majority was timing related and we expect to incur these costs later in the year.

Adjusted segment profit per barrel was $0.62, which was in line with the midpoint of our guidance. Adjusted segment profit for the facility segment was $146 million, which was approximately $15 million above the midpoint of our guidance. Volumes of 126 million barrels of oil equivalent were slightly above the midpoint of our guidance.

Adjusted segment profit per barrel was $0.39, or $0.04 per barrel above the midpoint of our guidance, and it was primarily due to higher than anticipated throughput and related fees at several of our terminals and lower operating costs. A portion of the lower operating costs was timing related and we expect to incur those costs later in the year.

Adjusted segment profit for the supply and logistics segment was $84 million, or approximately $19 million above the midpoint of our guidance. Volumes of approximately 1.1 million barrels per day were basically at the midpoint of our guidance.

Adjusted segment profit per barrel was $0.82, or $0.19 above the midpoint of our guidance. The higher than anticipated adjusted segment profit was primarily due to market opportunities created by various differentials that were more favorable than forecasted and lower than expected operating costs.

Let me now move to slide 6 and review the operational assumptions used to generate the third-quarter 2015 guidance we furnished yesterday. For our transportation segment we expect volumes to average approximately 4.8 million barrels per day, an increase of approximately 251,000 barrels per day from the second quarter.

We expect adjusted segment profit per barrel to remain equal to that of the second quarter at $0.62 per barrel. The volume increase is due to several factors including the continued ramp up of our Cactus Pipeline and the related impact on our Eagle Ford joint venture pipeline, as well as the completion of a couple of our Delaware Basin expansion projects.

Although volumes are forecasted to increase in third quarter, the increase is lower than previously forecasted. The lower volume growth is primarily due to a refinery turnaround that impacts our Mid-Continent Pipeline in the third quarter, a slight delay on the ramp up of our Cactus volumes primarily due to weather delays affecting the start of an Eagle Ford joint venture expansion at Corpus Christi, and the impact of the shutdown at the All American Pipeline system from Las Flores to Pentland.

With respect to our All American Pipeline system, we will not be in a position to address the return to service timing until the metallurgical and root cause analysis are completed, which we expect to be occurring in the next 30 days. At this point we do not believe this segment of the line will be in service for the remainder of 2015.

The revenue impact, net of variable operating costs associated with the shutdown of this segment of the line, is approximately $8 million to $9 million per quarter. In the third quarter our operating costs are expected to be higher due to a combination of the shift in the timings of our integrity projects and the costs related to the incident in Illinois.

For our facilities segment we expect an average capacity of 125 million barrels per month, a decrease of 1 million barrels per month for the second quarter. Adjusted segment profit per barrel is expected to be $0.35, or $0.04 per barrel lower than the second quarter.

The volume decrease is attributable to lower than anticipated rail volumes, and the segment profit per barrel decrease is driven by the shift in timing of certain maintenance and integrity projects into the third quarter. For our supply and logistics segment we expect volumes to average 1.1 million barrels per day, which are in line with volumes realized in the second quarter.

Adjusted segment profit per barrel is expected to be $0.76, or $0.06 per barrel lower than the second quarter. The anticipated segment profit per barrel decrease in this segment for the second quarter reflects margins that are tighter than experienced in the second quarter particularly in areas where new pipeline capacity debottlenecked from previously constrained production areas. I will note that performance in the third and fourth quarters for this segment is forecasted to be slightly stronger than anticipated when we provided our second quarter guidance.

Let's now move to our capital program. As shown on slide 7 we have increased our 2015 expansion capital plan by approximately $50 million to revise the 2015 target of approximately $2.2 billion. The increase is due to a combination of a couple factors. First, we've accelerated the timing of the construction cost spend for the Saddlehorn joint venture pipeline but have deferred construction costs related to our Diamond Pipeline project. And second, we've added a couple of expansion projects at our St. James Terminal.

Slide 8 provides an update on the expected in-service timing of some of our larger projects. In the Permian Basin where we plan to invest approximately $410 million this year we expect to place several of our Delaware Basin expansion pipelines into service in the third quarter. These projects include the extension of our Blacktip system into Culberson County, the 20-inch loop of our pipeline from Blacktip to Wink, our 24-inch loop of our basin pipeline system from Wink to Midland, and late in the quarter our 16-inch pipeline from Barilla Draw area to Wink.

In the Eagle Ford in the second quarter we placed into service the loop of the Gardendale to Three Rivers segment of our pipeline joint venture in conjunction with the startup of the Cactus Pipeline.

The expansion of the Three Rivers to Corpus Christi segment of the joint venture pipeline had a slight delay due to the wet weather conditions we experienced earlier this summer, but is being placed into service this month. The maritime gathering system, which is also being built by our Eagle Ford joint venture, will connect the joint venture pipeline at Three Rivers and will also go into service later this month.

The gathering system will have a total capacity of 100,000 barrels per day. In the Mid-Continent our capital investments are largely concentrated on three demandful pipeline projects, which includes Diamond Pipeline from Cushing to Memphis, the Red River Pipeline from Cushing to Longview, and the Caddo Pipeline from Longview to Shreveport.

The permitting timeline for the Diamond Pipeline looks likely to cause us to push approximately $90 million of the capital spend from 2015 into 2016. As for the Red River and Caddo pipelines, we recently completed successful open seasons for both pipeline projects.

The Red River Pipeline is a 16-inch pipeline that will run from Cushing, Oklahoma to Longview, Texas, enough capacity to deliver approximately 150,000 barrels a day to local refineries in Oklahoma, as well to refiners that could source crude oil from the Longview Terminal. The Caddo Pipeline is a 50/50 joint venture with Delek Logistics. It will be a 12-inch pipeline from our Longview Terminal to Shreveport with the ability to transport up to 80,000 barrels a day to refineries in the Shreveport area and connecting the Delek's pipeline system that supplies to El Dorado, Arkansas refinery.

In the Rockies we expect the Saddlehorn joint venture pipeline to be placed into service in late 2016 with initial capacity of approximately 200,000 barrels a day and ultimate capacity of approximately 400,000 barrels per day. We will extend this pipeline to Carr, Colorado where it will connect with our Cowboy Pipeline. Our Cowboy Pipeline will be a 65,000 barrel per day pipeline that will extend from Cheyenne to Carr, Colorado.

This will create a system that will enable us to source crude oil from the Guernsey market through a connection with our Cheyenne Pipeline and deliver crude oil to Cushing through the connection with our Saddlehorn Pipeline. The Cowboy Pipeline is expected to be placed in the service in the fourth quarter of 2015.

In Canada we are progressing with the expansion of our Ft. Sask facility, where we plan to invest approximately $300 million this year. The cavern expansion portion of this project includes two 350,000 barrel spec product caverns with a 500,000 barrel multi-use product cavern, two ethane caverns with a combined capacity of 1.6 million barrels, and approximately 5 million barrels of additional brine capacity.

All of these projects are advancing on schedule and are expected to be placed in service in phases beginning in the third quarter of 2016. The 20-car propane rail loading facility is expected to be in service in the third quarter of 2016. Lastly our 20,000 barrel per day expansion of our Ft. Sask fractionator, and that's supported by third-party commitments, is on track to be in service in mid-2017.

Finally our rail facility at Crawford Terminals is expected to be in service in the fourth quarter, and we are nearing completion of modification to our St. James rail facility that will enable us to receive Canadian crude oil at St. James. For maintenance capital, expenditures for the second quarter totaled $52 million. We expect maintenance capital for 2015 to range between $205 million and $225 million.

With that, I will turn the call over to Al.

Thanks, Harry.

During my portion of the call I will review our financing activities, capitalization and liquidity, as well as our guidance for the third quarter and full year of 2015. We did not have any financing activity in the quarter.

From and equity perspective this was primarily attributed to the $1.1 billion of equity we raised in the first quarter, which funded the majority of the equity component of our 2015 capital program. As a result we did not issue any additional units to our continuous operating program in the second quarter.

As illustrated on slide 9, PAA ended the second quarter with strong capitalization and liquidity and credit metrics that are consistent with our targets. At June 30, 2015, PAA had a long-term debt to capitalization ratio of 51%, a long-term debt to adjusted EBITDA ratio of 4.0 times, and $3.1 billion of committed liquidity.

Slide 10 summarizes the information regarding our short-term debt, hedged inventory, and line fill at quarter end. Moving on to PAA's guidance, which is summarized on slide 11, we are forecasting midpoint adjusted EBITDA of $480 million and $2.275 billion for the third quarter and full year of 2015 respectively.

Our guidance continues to assume that 2015 oil prices will average approximately $50 per barrel, resulting in suppressed drilling activity throughout the year, and that 2015 exit rate for production will be below 2014 production exit rates. Our updated adjusted EBITDA guidance for the second half of 2015 contains a decrease of approximately $75 million from the guidance we provided in May, which is a net decrease of $50 million for the full-year guidance after taking into consideration our overperformance in the second quarter.

The main drivers of the decrease are lost revenue associated with the pipeline shutdown in California as a result of the line 901 incident, reduced volumes and cash flow in our rail activities due to the expectation that tighter margins we experienced in the second quarter will continue to impact rail volumes for the remainder of the year, higher operating expenses due to the shift in timing in some of our integrity spending, plus the costs related to the incident in Illinois, lower volumes on a couple of our pipelines partially offset by the expectation that margins in our supply and logistics segment results will be better than previously forecasted.

As a reminder and as illustrated on slide 12, our adjusted EBITDA profile is a U-shape, reflecting the seasonality of our NGL business. Although this negatively impacts our distribution coverage ratio in the second and third quarter, this is expected and it is consistent with the adjusted EBITDA profile contained in the 2015 guidance that we furnished in February.

The directional illustration from our February call is depicted in the upper right section of the slide. For more detailed information on our 2015 guidance, please refer to the form 8-K furnished yesterday.

With that, I will turn the call back over to Greg.

Thanks, Al.

I have several matters to address in my closing remarks, including recent organizational editions and promotions, observations on crude oil market conditions and equity market valuations, and our current thoughts on distribution guidance. However, before I go any farther I want to take this opportunity to thank all of PAA's employees for their continued focus on safety and execution these past several months.

Despite incident related challenges and volatile market conditions, the entire team has worked very well together to advance PAA's organic growth projects and execute PAA's plan. I want to especially acknowledge and thank the employees and their families that have been directly and indirectly involved in responding to the two unfortunate operating incidents in California and Illinois.

Both Harry and I were able to see firsthand the significant level of skill, commitment, and professionalism that they demonstrated during some very challenging times, and the unbelievably long days and nights that they worked under intense and stressful conditions for extended periods. I also want to recognize the rest of the team that has worked diligently behind the scenes to take on additional burdens and keep our asset base on track -- asset base business on track. While the incidents themselves are regrettable, the response from all of our employees has been truly impressive.

With respect to PAA's organization, in mid-July we made several announcements. The first was that Willie Chiang will be joining our executive Management team as EVP and Chief Operating Officer for PAA's US operating commercial activities and will be reporting directly to Harry. Harry and I have worked closely with Willie in a number of capacities for several years, and we are very pleased to have him join our team and look forward to Willie playing an increasingly important role in the leadership of the organization over the next several years.

We also announced the promotions of Sam Brown and John Keffer to the position of Senior Vice President, and Jeremy Goebel and James Pinchback to the position of Vice President. In addition to recognizing the significant contributions and strong leadership capabilities of these four individuals, these promotions also set the stage for future advancements of other leaders throughout our organization as we anticipate additional promotions, and related changes in reporting responsibilities will be implemented over the next 12 to 18 months. All of these changes are consistent with our established Management development and succession plans. We have an extremely long and deep roster of talent, and believe Plains is well-positioned for the future.

We also announced that John Rutherford was retiring to pursue personal interests. That development was not part of our long-term plans, but we have a very strong team in place and are in good shape in that area going forward. That said, John will be missed, as many of us worked closely with him when he served as the advisor to Plains for over 10 years before joining us full time in October 2010. We all hold John in very high regard and we thank him for his significant contributions to the Company and wish him well in his new endeavors.

Let me move on to our outlook on the energy sector. At our investor day on June 4, we shared our very positive intermediate to longer-term view of the crude oil midstream sector, and our belief that PAA is well-positioned to participate in the midstream build out, as well as the various commercial activities required to support the ongoing North American crude oil renaissance.

We also indicated that this positioning underpins our ability to generate attractive distribution growth for the next several years. At the time of our investor day on July 4, WTI prices were approximately $60 a barrel, and we also shared our view that in the near term we believe the environment could prove difficult as oil prices would likely come under pressure which could result in challenges for midstream entities needing to access the capital markets and also stimulate potential acquisition opportunities.

Over the roughly 60 days since our annual investor day, crude oil prices have declined at one point by nearly 25%, falling from roughly $60 per barrel to $45 per barrel. And yesterday WTI was trading in the $45 to $46 per barrel range.

Midstream equity valuations have also traded down over that time period with the Alerian MLP Index currently trading approximately 13% below its level in early June, and access to equity markets appear to become more challenging. Through July 1 of this year the midstream MLP sector completed 26 equity offerings including IPOs, raising over $8.4 billion.

Recently the pace has slowed considerably with only two midstream offerings since July 1 raising just over $700 million. Our updated guidance for 2015 incorporates the results of our ongoing efforts to refine our multi-year forecast to take this challenging environment into account.

Although our updated 2015 guidance remains in line with the full-year guidance range we provided in connection with our 2014 earnings call earlier this year, it is admittedly near the lower end of the initial range. Looking toward 2016, I wanted to acknowledge that our internal forecasts incorporate a more cautious view today than they did at the beginning of 2015. Our updated outlook reflects a more conservative assessment of the impact that aggressive competition from over-built infrastructure in several areas could have on PAA's margin and volume capture.

This updated view is primarily influenced by two factors. The first factor is the delayed impact of the higher level of capital that has been generally available to midstream competitors over the last 12 to 15 months, prior to the timing I mentioned and the excess logistics capacity that those funds either have or will create. As you may recall from the report card we shared at our 2015 investor day, and which is also shown on slide 13, we scored very well on the majority of elements incorporated into our multi-year outlook.

However one of the items we did not score well on was our mid-2014 assumption that capital markets access would be restricted if commodity prices fell meaningfully, and that therefore it would inhibit the ongoing development of logistics projects that we believe are marginal or unnecessary. That has proved not to be the case, at least until here very recently, and as a result there has been more midstream logistics capacity built than we previously forecasted. And it has either been built or under construction, and that will increase competition and also impact our volumes and margin.

The second factor is the magnitude of the impact on regional markets in differentials that ship-or-pay arrangements have had and will likely continue to have during periods where volume growth falls short of Company forecast. While we anticipated some impact from these ship-or-pay arrangements, we have been surprised by the magnitude of the impact and their impact on regional differentials. We believe this situation was likely exacerbated by production restrictions related to the Canadian wildfires and crude oil build by the Strategic Petroleum Reserve.

In certain areas we are seeing volumes purchased and moved in ways that run counter to the movements that would be suggested by current market conditions, suggesting that the inferior economic movements are related directly or indirectly to the mitigation of ship-or-pay financial obligations. Our 2016 operating financial outlook also incorporates assumptions regarding downtime for line 901 and line 903 in California, as well as weather and other regulatory-related timing adjustments for certain projects.

Individually none of these items are particularly significant, but in the context of our cautious industry outlook and what we believe will be increased competitiveness, the collective impact gives us reason to pause and recalibrate. To be clear our capital projects are expected to perform in line with our long-term return expectations, and we anticipate adjusted EBITDA for 2016 and 2017 will increase in the neighborhood of 10% and 30% respectively over our 2015 guidance. This expectation is based on our view of a recovery occurring in mid-to-late 2016, current timing for our transportation facilities capital projects, and baseline performance from our supply and logistics segment.

As we have in the past, we will provide shadow guidance for 2016 in our November earnings call, and more specific guidance during our year-end earnings call in February. Our reason for mentioning it at this point is to put the current environment in the context with our near-term results, and inject a note of caution regarding the next 18 months with respect to distribution growth.

At the beginning of the year, we established a 2015 growth target for PAA -- 2015 distribution growth target for PAA of approximately 7% with the recognition that 2015 distribution coverage would be slightly below one to one, but the expectation that coverage would be one to one or better in 2016 and return to sustainably healthy levels in 2017 and beyond, while maintaining attractive distribution growth throughout. For the reasons I just discussed, maintaining a similar distribution growth for 2016 in today's environment would require an extended period of sub-one to one distribution coverage and be at odds with our objective of maintaining sustainable minimum distribution coverage of approximately 105%.

Again the purpose of these comments is not to lock in or communicate to you a specific game plan with respect to 2016 distribution growth, but rather in keeping with our practice of transparency, our desire to inject caution, and manage near-term expectations given the combination of a cautious near-term industry outlook and recent events that have impacted our operating performance at the margin. I do want to note that given the challenging marketing conditions and the adjustments we've made to the 2015 guidance, we are reducing our target distribution growth for 2015 to 6% versus the initial target of 7%. Based on the updated guidance and the 6% target, our full-year distribution coverage is forecast to be 0.93.

Additionally if current conditions remain challenging in early 2016, among the options we will need to consider is whether to view 2016 as a transition year with much lower distribution growth, or as a year to defer any distribution growth until 2017 when coverage increases as a result of meaningfully higher EBITDA levels related to our various growth projects. We will provide further guidance in this regard later in the year when we provide shadow guidance for 2016.

Before we open the call up for questions, let me also highlight that we have not baked in the benefit of any acquisitions into our outlook and we believe that the availability of attractively priced acquisitions and PAA's ability to compete for such opportunities should be enhanced during periods of challenging industry conditions that are accompanied by limited access to capital markets. We believe PAA should be relatively advantaged during such periods as a result of its solid financial position, past acquisition experience, and ability to leverage its existing asset base and business model to realize fundamental synergies.

With that, we are ready to open the call up for questions.

(Operator Instructions)

Steve Sherowski, Goldman.

Hello, good morning. Just on the revised PAA distribution guidance. Do you have similar guidance revision for PAGP for 2015?

Steve, because of the fact of the issued units earlier in the year on PAA, if you extrapolate that 6% out to PAGP it will still come in at about 21% which was what we targeted for 2016 -- 2015.

Okay, all right, great. And on your earlier comments when you spoke about over-built infrastructure impacting margins, is this primarily in -- I guess what segment is this primarily in or is this across the board? And what basins are you seeing the more acute over-builds?

You know it reflects two things. One what we're actually seeing and what we're anticipating seeing.

Because clearly we've got some visibility in the projects that aren't in-service yet. But I would say in general it's across the board.

Yes, there are certain areas today because projects have been completed that are more intense. But when you combine those with the ship-or-pay commitments for example in the Permian today, Midland is trading at $1 premium or thereabouts to Cushing. You would normally expect that to be the other way around.

We think part of that is a combination of the excess capacity out of the basin combined with the ship-or-pay commitments. But you have those also occurring in the Eagle Ford and in the Rockies as well.

And in the Eagle Ford you also have in addition to ship-or-pay you have new facilities coming on that have commitments as well.

Understood. Thanks. And just a final quick question.

So in your adjusted EBITDA guidance for -- I know this is preliminary but for 2016 and 2017, what gives you confidence in that step up in growth between 2016 and 2017? Are there any projects in particular that you would point to or is this just based on the assumption of a recovery in crude oil prices?

I'd say the majority of it is based upon the projects that we see coming into service, many of which, Steve, are backed by commitments. And so what we did is in our outlook we reverted back to a baseline guidance for supply and logistics, which call it roughly $500 million to $550 million. And then the balance of that is, as we have been seeing and continue to expect to see, is growth in the facilities and transportation on a fee base.

And in many cases we've tried to take into account the competitive issues that we just talked about. We do have an expected market recovery in mid- to late 2016 that's going to have volumes dip and then start to recover.

But again in many cases we've got commitments on those projects. So we feel pretty good about the 10% growth in 2016 and roughly 30% in 2017 over the 2015 levels.

Got you. That's it for me. Appreciate it.

Thank you.

Brian Zarahn, Barclays.

Good morning.

Good morning Brian.

I appreciate the preliminary guidance. I know it's earlier than you normally do it and so it's appreciated in the context of the environment we are in.

Just given the ramp a little bit more in 2017, can you maybe elaborate on your thoughts on distribution coverage during this time period and how you balance that with providing some level of growth? So how do you balance those two variables in this environment?

So again, we certainly like the target back in the base level environment, which is what we're including in this forecast. About a 105% coverage at the minimum.

And effectively as we look out through 2016, which again will be -- we're expecting to be challenging and so we're waffling quite candidly on whether there's going to be any distribution growth or whether it is going to be modest. But we feel fairly robust when you run the numbers on the 30% growth over current levels, about returning back to something that is very respectable and attractive in the mid-single digits of growth in that area with we'd only do that with the idea of being able to achieve the 105% coverage and grow.

Then on projects, given the commodity price environment and its turning back negative, probably will see some more bankruptcies from smaller producers. How do you think about the counterpart of your risk on your base business and your projects? Obviously the bigger ones you've identified some of the demand pull counter-parties, but I guess from a higher level how do you think about counter-party risk in the next 12 months to 18 months?

Responding to your question and then also one that's kind of implied in there is when we looked at the ship-or-pay commitments we started to look at credit as an issue and who are counter-party is. We've also looked at what we think our competitors credit issues are because to some extent if some of barrels that are being purchased away from the logical moves on our asset are going to one that's not logical but it makes sense because of ship-or-pay, we've tried to look through that to figure out whether those entities actually can honor their commitments and survive.

We feel pretty good about the ship-or-pay commitments on our assets and the counter-parties that we have, whether they be demand pull or production push. We're not without some exposure to companies that aren't investor grade, but most of ours really have quality investment-grade commitments behind them.

So we feel pretty good about that, and we've tried to dial some what I'll call friction into the mix that says things don't go perfect and that we have some challenges. I think what that also implies, and I tried to kind of cover in my very last comment, is we think that some of these areas where there has been excess logistics build that may be based on commitments from other parties that don't have high credit quality, that those could be acquisition opportunities for us.

And that we could consolidate those nicely into our system and achieve operating efficiencies. So that's not built into our numbers, but we think that's probably a little bit of an effective hedge against perhaps unknowns that aren't built into our guidance.

Last one for me and following up on your comment. You have been very patient on M&A partially due to the very competitive environment that we've seen. Do you think we are finally in a place where you can see more opportunities like you just mentioned that would potentially provide some upside to your outlook?

I'm going to give you a qualified yes. The qualification is as long as the capital markets don't continue to fund irrational optimism, then I think the answer is yes.

Because I think when we run our analysis we think there are companies that have funded commitments that they don't have on their balance sheet, but they are counted on the EBITDA. And we think at some point in time those two have to be synched up.

So if the capital markets will not continue to provide very cheap and fluid capital then I think there are going to be some opportunities in there. And we in many of those cases I'll bet, Brian, we bid on 20 to 30 acquisitions where we felt very good about wanting to own those assets and having synergies. And in many cases we were outbid by 30%, 40%, even 50%.

Those assets are still good. They would still fit with us, but it's a question of whether those companies can extract the values that are implicit -- need to be in a 50% higher valuation than what we would place on them. Again if they can raise money very cheaply than they can push that issue out for a couple of years.

If the answer is that's come to a halt well then I think we're in great position to take advantage of our strong balance sheet and operating synergies that are fundamental to our business and give us a competitive advantage. Wouldn't you say, Harry?

Yes. I would. You're still seeing a little bit of high valuations, but I'll echo what Greg said as we advance in this market we would expect to see opportunities that make sense for us.

Thanks for the call guys.

Thank you.

Faisel Khan, Citigroup.

Thanks. It's Faisel from Citi. Just going back to the shadow guidance for 2016 as you call it.

The coverage ratio, you talked about 105%. So is it fair to say that that's the ratio you want to defend whatever the environment is for next year? Is that how we should look at it?

I'd say that's a very important consideration as we look through it. Faisel, if you go back again to what we try to do, and quite candidly it didn't prove to be the smartest thing we could have done.

We knew that coverage in 2015 would be sub-one to one and we had targeted the 7% growth. But as we look through to 2017, we felt like we could maintain that growth through 2016 and 2017 based upon the environment assessment and what we thought would be reduced capital availability across the sector, which would stop some of the competitive issues that we are now facing.

That turned out not to be the case. People funded throughout the dip from $100 oil to $45 oil, and then as it rallied back towards $60, they even raised more capital.

So when we look at that it makes growth in 2016 certainly at the levels of 6% or 7% very challenging to maintain even a one to one. So that's where we're at.

Depends on when we get to the end of the year and we look at what the environment looks like, whether we would choose to go the route of perhaps sub-105% in marginal distribution growth. Or whether we simply punt it to 2017 where we have clear visibility to significant coverage and the ability to return back to something that is in the mid-single digits. And part of that issue is encapsulated I think in our appendix.

We put a slide in there that shows what we think is the biggest overhang right now on causing uncertainty about volume growth, is inventory levels. Today's results basically pegged out, where if we updated that slide today, we're right on track with where we think we would have been.

So we are expecting to end the year somewhere between 23 million and 80 million barrels above normal. That's got to be worked off.

We think that could make the first six months of 2016 difficult. And if it is, we are probably looking to 2017 for the resumption of growth instead of 2016.

Okay. And then as I look at your guidance going into the third quarter that you guys put out in your 8-K, your lease gathering guidance goes down about 2% from this quarter into the third quarter.

What's driving those lower volumes as you move into Q3? Is it these inventory issues you're talking about or is it more producer activity that is driving that in your model?

There's some seasonality that's built into it. I think if you look at Al's chart in the comments and -- but I think part of it is we're also expecting to see volumes begin to roll over. There's a lot of conflicting data.

We all try to use, and I'm sure you do as well, the EIA as a source of data. But when you try to square up their weekly data with their monthly data, it doesn't all pan out.

We're certainly starting in certain areas to see volumes come in short of expectations of the producers. Part of that, Faisel, is going to be as they shift to pad drilling that causes lumps in the growth.

But at the same time we think in certain areas we are seeing the cume activity start to catch up to where we're at. I'd say it's certainly flattening and probably starting to roll over.

Okay.

Just to elaborate on that a little bit. I think it's actually -- it's pretty flat between second and third quarters. What you are seeing there is a higher first quarter impacting the first six months.

Okay. I saw that you guys did $965 million roughly in the second quarter and in your guidance for the third quarter was $945 million. So that's I was just trying to iron out. I can follow up with you offline.

If we get it that close we are really happy. That's what the model spit out when we collect the information from the guys.

And as Greg mentioned, we are allowing for some of the competitive pressures that he mentioned will affect the lead side as well behind some of those T&Ds.

And going back to your comments on the financing, obviously you didn't need any equity financing in the second quarter. It looks like your guidance also assumes some unit issuances as you go into the end of the year.

I just want to understand that. Do you still need to issue equity going into the end of the year, or are you all trued up for now?

Certainly we are always trying to stay well funded and in a position where when an opportunity comes up we don't have to worry about do we need capital? I think we put a very modest amount of funding in there using basically the ATM.

If we're in a weak market we certainly don't have to try to force our way into it. We think that's probably in contrast to some of our competitors who probably are in a situation where they are going to need to meet obligations.

The funding that we did in the first part of the year, that was again one of opportunity we looked at and said gosh, we need this equity, let's go ahead and get it now. I think it's bearing out.

So we will monitor that and if the markets are favorable relative to the cost of capital and the projects that we are funding we're certainly not going to restrain ourself and go zero. But we're not going to try and to force our way into the market either.

Okay. On Canadian propane prices, NGL prices obviously have been fairly weak in the last quarter. How did that impact you guys and how does that impact you guys going forward?

You know, it's basically a margin business, so as long as the volumes are there we're not really that sensitive to the outright price of propane. The weaker propane price is actually great, better storage economics.

Okay. Makes sense.

And then in the quarter your costs on the transportation side were up substantially over last year, I know you brought some new assets to the service. I'm just trying to understand how much were the California and Illinois incidents in that $209 million cost that you have in transportation for the quarter?

Well the California, we factored that out and the Illinois didn't happen until the third quarter, so shouldn't be much chatter in there. Certainly we had some lower volumes in California which if you look at it on a per unit basis it will be a little bit influenced by that.

I think you probably are looking at maybe the reported number with the $65 million in it.

Yep. Okay. Got you.

Makes sense. Thank you. Appreciate the time.

Thank you, Faisel.

Jeremy Tonet, JPMorgan.

Good morning.

Good morning, Jeremy.

Just wanted to clarify a little bit more on the over-capacity that you guys saw in certain places. It seems like some refiners are talking about Delaware discounts to Midland prices. So I was wondering if you could talk a bit more, is it gathering or mainline over-capacity when it comes to the Permian in particular?

Well the Permian, the Delaware Basin infrastructure isn't built out yet, so you're still seeing some discounts because of logistical constraints. We see a lot of that being lifted starting in the third quarter.

We've got a number of pipeline projects that go into service and really deep bottleneck a lot of the Midland Basin. There might be a little bit of a quality discount to some of the higher -- the lighter volumes.

But we haven't seen much of that prospect in our business. But I think if you look at some of our comments we see margins getting a little tighter because -- in areas where you had pipeline constraints, and Delaware is probably the biggest area where we see that being relieved the second half of the year.

Yes we've got several projects that are going to be coming on stream here in the next, well during the third quarter. So we are expecting that to lighten up quite a bit.

Got you. Thanks for that.

You've touched on it a bit here, but I was just wondering if you might be able to talk a little bit more as far as mid-2016 recovery that you guys are currently looking for. What do you think are the key risks to that being earlier or later, that being the inflection point?

So part of it is going to depend on how quick we can roll this inventory off that has been building. We've got quite a bit of turnaround.

If you look at our chart, we are expecting a build to start happening in October or November. A lot of turnaround is coming.

The most quick solution to lower the inventory build is to stop importing more barrels. So part of it, Jeremy, is just how aggressive the Mid-Eastern countries are in trying to price those barrels into our market.

So far they have been pretty aggressive. I think cume date, even though we've had high inventory levels and low prices, total imports into the US have been only down about 120,000, 130,000 barrels a day cume to date.

That's pretty amazing when you think about it especially considering that Canada had about 200,000 barrels a day reduced imports in the second quarter over the first quarter because of the Canadian fires. So I would say whatever activities of foreign countries with respect to trying to push barrels into our market will have an impact on that.

The other one is, just how US producers collectively act over the next 6 months to 9 months, maybe 12 months. I refer to it as if we had stayed on the 21-day diet, we would have been fine, but about it looked like 10 days to 15 days into the diet people started picking up rigs and saying let's go back after it again.

And that turns it into a 45-day or 60-day diet. So I think that could extend it.

Candidly we had picked June 30 as kind of our inflection -- June 30, 2016, as our point where we thought at that point we'd pick an over and under on prices for WTI probably in the neighborhood of $70. Partly because we thought the inventory situation would clean up by then, or if it didn't we would see visibility for it to clean up.

Which means you've had continued production roll over in the US and you've had some concession from the Middle Eastern companies that they've caused enough pain to quit forcing barrels into it to complicate that. There are so many variables in it, Jeremy.

If Iran comes on and they don't make room for them, it could get ugly a little bit longer. Again, that would probably hurt our near-term outlook but probably improve the overall long term because of the rationalization that would have to happen in competitors that we have that have marginal outlooks in that type of environment.

We think 2016 is the year of transition. We think we picked it right at the mid- to late part of recovery, but could it be a little bit later? It certainly could depending on events going on overseas.

Great, thanks. And with that backdrop as far as growth -- CapEx spend is concerned, are you guys looking to rein in at this point? Or do the projects you have have significant commercial support that it still makes sense to go forward?

All the project that we have that are obviously in the hopper this year and carry over into next year are pretty solid projects, and that's really what provides the uplift in 2017. In many, many cases they are backed by commitments from credit quality and credit worthy companies.

And so don't see much change in that. Certainly with respect to new projects you're going to take a real long look at making sure that you've got real strong counter-parties if they're willing to make a commitment at all.

Or you've got real high conviction as we have for example in the Delaware where we've gone in and built some pipeline projects that we could connect to our existing ones that gave us a competitive advantage because we said that's going to be the last place in the country that rigs are going to be laid down. We are going to be the guys there to pick the volumes up.

Near term, Jeremy, that causes some pressure on the returns, but we're building assets that have a 70-year life and that's the business that we are in. So we are willing to take probably skinnier returns near term with the longer because of lower volumes, but knowing that we think the volumes -- it's not a question of if but when we're in a position to be able to do that because of our balance sheet.

And five years from now when we look back, we will have a better company because we went ahead and pushed a project that didn't have maybe all the commitments that you'd like to have, but because it's part of our system we can do economically. We think that the challenge is going to be for the one trick pony companies that are trying to build a project out there, that they really don't have the scale to be able to take advantage of it.

We feel pretty good about our projects. If your question is are we going to go out and try to build a lot more projects without commitments, the answer is no. Are there areas where we would do that? They are very limited, and there are some.

Got you, thanks for that. And then one last one. As far as M&A is concerned, with the bid at spread I'm just wondering access to capital being tighter with cost of equity being higher for the space, do you see that widening out the spread there? Or any thoughts on that?

What we hope is that expectations for sales come down, or the forced sales will cause more rational prices. Clearly we're not the only ones out there looking to buy and in position to.

But if the capital markets aren't open to the competitors that don't have an existing base and their cost of capital at the margins means they're higher than ours, I think we're just really well-positioned. So we certainly expect to be more active in acquisitions over the next 24 months then we have been in the last 24 months.

Great. Thanks for that. That's it for me.

Thank you.

Gabe Moreen, BofA Merrill Lynch.

Good morning, everyone. Most of my questions have been asked. I was wondering have you thought about a lot of other [mystery] means?

You've discussed cost cuts and belt tightening. Is that something that is being contemplated here or that may be in your guidance?

I mean we are always trying to stay prudent, Gabe, on that. We are more focused in on building out over the long term. So we wouldn't want to cut costs and forego opportunities that cause an interim benefit but a long-term detriment.

That's not our focus. We're not in a situation where we have to tighten our belt just to stay alive. And we're not trying to defend a distribution growth level that we could achieve in the short time with cost cuts that don't make sense long term but would achieve that short-term goal.

Again we'll be looking at things. Clearly when you have skinnier results you have skinnier bonuses, if any bonuses.

That type of thing we'll be looking at. But we're not looking to start cutting heads just so that we can say we can make a distribution target in the near term and then realize that we sacrificed our long-term business plan.

Understood. And then I guess in terms of the balance sheet, clearly you are pushing a little in terms of that 4x debt to EBITDA.

You had some hard-fought battles that you wanted the rating and just even getting upgraded. Just wondering in terms of whether you'd be willing to sacrifice a knot or two within investment grade to take that leverage up if the equity markets continue to be so choppy?

Wouldn't want to go there right now. I think one of the things you should look at is that yes, we're at the upper end of our range but we're there because this is a very weak market.

The reason you have a range is so that you can basically say I want to operate within this through the cycle. The fact that we are at 4.0 in what may be one of the worst parts of the cycle and we look around at our peers, many of them are well above four and in some cases above five.

And I think they are going to be the ones that are under more pressure than we are. If your question is will we go ahead and lever up just because the equity markets weren't available, that's hard to -- how good is the opportunity?

But not just to philosophically to say we'll do it just because equity costs are higher. We're going to look at it from a total cost of capital and a total return on the projects.

I think the market has a way of self-discipline when capital markets aren't available to everybody. That hasn't been the case recently. And so I think we're kind of looking forward to where math matters.

And Gabe, I would add the growth that is embedded in the 2016 and 2017, a lot of that capital has been funded already. So you see a natural deleveraging based on that growth; i.e. the 30% Greg mentioned on the call 2017 over 2015.

Got it. Thanks guys.

Sunil Sibal, Global.

Hi, good morning guys and thanks for the detailed color. Many of my questions have been asked, but just one quick one.

When you think about the M&A situation and also a situation like the costs associated with a crude spill, I was wondering any particular support that the general partner, PAGP can provide in situations like this to mitigate the impact on the healthy guys?

That's not been part of the discussion at all to date. Clearly the GP IDR modifications have been really in connection with opportunities that either we could not achieve the near-term accretion that we thought was necessary to support the capital raise or that was necessary for a long-term strategic move that had a tight cost of capital, a tight spread relative to our cost of capital. We will certainly look at those opportunities, but the typical operating cycle is not part of what we would incorporate into that discussion.

All right. That's helpful. That's all I have, thanks.

Thank you.

There are no further questions at this time.

I want to thank everybody for dialing into the call. We look forward to updating you on our results for the third quarter in November. And again, thanks for dialing in.

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