can someone explain why paa bought into a pipeline last august which we now are told is going out of business? how might this affect the bottom line moving forward? any info out there would be appreciated especially since paa mngt. doesnt seem to be very forthcoming. thank you....small investor
I think this pipeline might have been bought as part of a larger package. Nevertheless, Rancho was seeing declining volumes being transported through it. With Rancho having multiple owners, and being a common carrier pipeline, there were obviously multiple tariffs involved. The various owners were charging lower and lower tariffs to attract throughput to their respective capacities, to a point where the volumes being transported at the low tariffs were not profitable. Hence the shutdown. However, weep not for PAA. Much of the oil that was being transported on Rancho will now be moved over to Basin, which PAA also operates and which has a higher tariff.
By the way, lest you think that the other owners in Rancho are getting the shaft in this, TEPPCO, which owns 25% of Rancho, is also an owner in Basin. They will derive higher tariff revenues also. The parties who will suffer will be producers of West Texas Sour crude, who overnight lost about $2-3/bbl on this announcement. However, its hard to feel sorry for them when NYMEX is trading at $37/bbl.
I recall the rancho line being discussed in the 10/29 conf. call. I think they mentioned that it would likely be curtailed as it was a small piece of the purchase and was redundant to other PAA assets. Obviously everyone new the agreement covering operation of the line was ending in 3/03 so not much of a surprise.