Plains All American Pipeline, L.P. (PAA)

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Plains All American Pipeline, L.P. (PAA)

Q2 2013 Earnings Conference Call

August 6, 2013 11:00 AM ET

Executives

Roy I. Lamoreaux – Director-Investor Relations

Greg L. Armstrong – Chairman and Chief Executive Officer

Harry N. Pefanis – President and Chief Operating Officer

Dean Liollio – President-Natural Gas Storage Business

Al Swanson – Executive Vice President and Chief Financial Officer

Analysts

Steve C. Sherowski – Goldman Sachs & Co.

Brian Joshua Zarahn – Barclays Capital, Inc.

Michael Blum – Wells Fargo Securities

Cory J. Garcia – Raymond James & Associates, Inc.

Mark L. Reichman – Simmons & Co. International

Bradley Olsen – Tudor, Pickering, Holt & Co.

Ethan Bellamy – Robert W. Baird & Co. Equity Capital Markets

Shneur Z. Gershuni – UBS Securities LLC

John D. Edwards – Credit Suisse Securities, LLC

James M. Jampel – HITE Hedge Asset Management LLC

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the PAA and PNG Second Quarter Results Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions being given at that time (Operator instructions) And as a reminder, today’s conference is being recorded.

I would now like to turn the conference over to our host, Director of Investor Relations Roy Lamoreaux. Please go ahead.

Roy I. Lamoreaux

Thanks, Paul. Good morning. We welcome you to Plains All American Pipeline and PAA Natural Gas Storage Second Quarter Results Conference Call. The slide presentation for today’s call is available under the conference call tab of the Investor Relations section of our website at paalp.com and pnglp.com.

I would mention that throughout the call we would refer to the company’s by their New York Stock Exchange ticker symbols of PAA and PNG respectively. As a reminder, Plains All American owns a 2% general partner interest in all of the incentive distribution rights and approximately 61% of the limited partner interest in PNG, which accordingly is consolidated into PAA’s results.

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

Today’s presentation will include references to certain non-GAAP financial measures such as EBIT and EBITDA. The non-GAAP reconciliations sections of our websites reconcile certain non-GAAP financial measures to the most directly comparable GAAP financial measures and provide a table of selected items that impact comparability of the partnerships’ reported financial information. References to adjusted financial metrics exclude the effect of these selected items. Also for PAA, all references to net income are references to net income attributable to Plains.

Today’s call will be chaired by Greg L. Armstrong, Chairman and CEO of PAA and PNG. Also participating in the call are Harry Pefanis, President and COO of PAA; Dean Liollio, President of PNG; and Al Swanson, Executive Vice President and Chief Financial Officer of PAA and PNG. In addition to these gentlemen and myself, we have several other members of our management team present and available for the question-and-answer session.

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

Greg L. Armstrong

Thanks, Roy. Good morning and welcome to everyone. Yesterday after market closed, PAA reported second quarter 2013 results. Second quarter adjusted EBITDA totaled $478 million, which exceeded the midpoint of our guidance range by approximately 10% or $43 million. It is important to note that these results included an approximate $25 million adverse impact to our fee-based results from unforeseen operational issues in Canada that occurred during the second quarter of 2013.

Despite the impact of these operational issues on our Transportation segment, our second quarter performance overall was essentially right on top of the performance expectations we provided on May 29, which was immediately prior to our Analyst Day. Compared to last year’s second quarter, adjusted EBITDA, adjusted net income and adjusted net income per diluted unit, decreased by 8%, 16% and 32% respectively, primarily as a result of more favorable market condition we experienced in the second quarter of 2012.

The quarter-over-quarter decrease in adjusted EBITDA is composed of a 7% increase in PAA’s fee-based businesses and a 30% decrease in Supply and Logistics segment. Absent the operational issues in the second quarter of 2013, adjusted EBITDA for our fee-based businesses would have increased by approximately 15%. As expected, our Supply and Logistics results decreased primarily due to narrow crude oil differentials. A summary of our second quarter 2013 results is on Slide 3.

As reflected on Slide 4, these results marked the 46th consecutive quarter that PAA’s delivered results in line with or above guidance. Additionally, for the second quarter of 2013, PAA declared a distribution of $0.5875 per common unit or $2.35 per unit on an annualized basis. This distribution represents a 10.3% increase over the partnership distribution paid in August 2012 and a 2.2% increase over the partnership distribution paid in May 2013. Distribution coverage for the quarter was 120%.

As reflected on Slide 4, PAA has increased its distribution in each of the last 16 quarters and in 35 out of the last 37 quarters. Yesterday evening, we also furnished financial and operating guidance for the third quarter and full-year of 2013. The midpoint of our 2013 full-year adjusted EBITDA guidance of $2.19 billion reflects $30 million increase over the full-year guidance we issued last quarter, primarily as a result of our second quarter over performance.

I think it’s worth pointing out that our full-year guidance was not adversely impacted by the recent collapse in crude oil basis differentials and the major shift in the crude oil market structure from Contango to Backwardation, as the potential impact of many of those changes were already incorporated into our forward guidance.

Before I turn the call over to Harry, let me take a few minutes to address the significant changes in market divisions that have taken place over the last several months, which I believe will help set the stage for Al’s and Harry’s comments on our future guidance. Slide 5 contains excerpts from PAA’s last three conference calls, which highlight that we have been anticipating that the debottlenecking and the infrastructure expansions at PAA and many other crude oil midstream entities have been implementing would be effective at reducing the wide basis differentials and shifting the market from Contango to Backwardation. As these comments indicate, we have been incorporating this outlook into our guidance as well as our longer term planning models for quite sometime. Essentially forecasting that performance from our Supply and Logistics segments were returned to base line levels.

For reference on Slide 6, we have included three graphs, showing basis differentials over the last 18 months for WTI and LLS, WTI and Brent, as well as the relationship with both WTI Midland and West Texas Sour to WTI Cushing pricing.

As included on Slide 6 on the lower right-hand corner, which we also included is a graph showing the market structure for the 12- month and the third-month for the WTI futures contracts over the last nine months.

We have noted the date of each of our last three conference calls to highlight the changes that have taken place over that last nine-month period. As a result of PAA’s disciplined approach to forecast the results for our Supply and Logistics segment, the recent shift in basis differentials in market structure did not have a material impact on our forward guidance or on our long-term planning models, which are prepared using baseline performance.

Read the rest of this transcript for free on seekingalpha.com