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Edited Transcript of PAA earnings conference call or presentation 7-May-19 9:00pm GMT

Q1 2019 Plains All American Pipeline LP and Plains GP Holdings LP Earnings Call

HOUSTON May 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Plains All American Pipeline LP earnings conference call or presentation Tuesday, May 7, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Al P. Swanson

Plains All American Pipeline, L.P. - Executive VP & CFO of Plains All American GP LLC

* Chris R. Chandler

Plains All American Pipeline, L.P. - Executive VP & COO of Plains All American GP LLC

* Harry N. Pefanis

Plains All American Pipeline, L.P. - President, Chief Commercial Officer & Director of Plains All American GP LLC

* Jeremy L. Goebel

Plains All American Pipeline, L.P. - EVP of Commercial of Plains All American GP LLC

* Roy I. Lamoreaux

Plains GP Holdings, L.P. - VP, IR & Communications

* Wilfred C.W. Chiang

Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC

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Conference Call Participants

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* Colton Westbrooke Bean

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research

* Danilo Marcelo Juvane

BMO Capital Markets Equity Research - Analyst

* Dennis Paul Coleman

BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD

* Gabriel Philip Moreen

Mizuho Securities USA LLC, Research Division - MD of Americas Research

* Jean Ann Salisbury

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Jeremy Bryan Tonet

JP Morgan Chase & Co, Research Division - Senior Analyst

* Justin Scott Jenkins

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Michael Jacob Blum

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* Shneur Z. Gershuni

UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst

* Sunil K. Sibal

Seaport Global Securities LLC, Research Division - MD

* Vikram Bagri

Citigroup Inc, Research Division - Former Senior Associate

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Presentation

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Operator [1]

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Good day, everyone. Thank you for standing by. Welcome to the PAA and PAGP First Quarter 2019 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Roy Lamoreaux. Please go ahead.

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Roy I. Lamoreaux, Plains GP Holdings, L.P. - VP, IR & Communications [2]

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Thank you, Hannah, good afternoon. Welcome to Plains All American's First Quarter 2019 Earnings Conference Call. Today's slide presentation is posted on the Investor Relations News and Events section of our website at plainsallamerican.com.

Slide 2 contains important disclosures regarding forward-looking statements and non-GAAP financial measures. The appendix includes condensed consolidating balance sheet information for PAGP.

Today's call will be hosted by Willie Chiang, Chief Executive Officer; and Al Swanson, Executive Vice President and Chief Financial Officer. Additionally, Harry Pefanis, President and Chief Commercial Officer; Jeremy Goebel, Executive Vice President, Commercial; and Chris Chandler, Executive Vice President and Chief Operating Officer, along with other members of our senior management team, are available for the Q&A portion of today's call.

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

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [3]

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Thanks, Roy. Good afternoon, everyone, and thank you for joining our call. Let me begin by hitting the high points of the information we released today. This afternoon, we are pleased to report first quarter results that meaningfully exceeded our expectations as outlined on Slide 3, and as Al will discuss in more detail, these results reflect strong performance on our margin base, Supply and Logistics segment and fee-based earnings that were in line with expectations. Accordingly, we have increased our full year adjusted EBITDA guidance by $100 million, to plus or minus $2.85 billion for the year.

With respect to positioning PAA for the future, we continue to execute on several key initiatives to create enduring value for our investors. In April, we announced the completion of our August 2017 deleveraging plan, updates to our financial policy and targeted metrics and an increase to our common unit distribution. As detailed in the announcement, we're taking a balanced, long-term approach to enhancing permanent value creation through our commitment to improving financial flexibility, making disciplined investments and prudently increasing cash return to equity holders over time. We will continue to optimize our system and drive for improved returns.

Over the past 3 years, we've executed approximately $3 billion of divestitures, several of which have been through strategic JV and joint operating agreements that have bolstered the durability and visibility of our fee-based business while allowing us to reduce debt and fund a large portion of our growth capital. Optimizing our existing capacity, leveraging our systems to sanction capital efficient projects and pursuing strategic JVs and divestiture opportunities have been, and will continue to be, central to our ongoing strategy. We remain highly focused on capital discipline and project returns and have sanctioned a number of additional strategic and accretive projects that bolt-on, extend or expand our existing systems, increasing our capabilities. As a result, and as Al will discuss further, we've increased our 2019 capital program by $250 million to plus or minus $1.35 billion.

Now I'd like to give you an update on our progress in building our Permian footprint as well as a few key other projects.

As illustrated on Slide 4, since the beginning of 2018, we have added approximately 1.7 million barrels a day of new Permian Basin system capacity. And by year-end, we expect this number to grow to more than 2.2 million barrels a day. This capacity is underpinned by a combination of long-term volume commitments and acreage dedications. We most recently placed into service approximately 500,000 barrels a day of gathering capacity upstream of Wink and approximately 670,000 barrels a day of intra-basin capacity from Wink to McCamey. We continue to sanction additional complementary growth projects in the Permian, and as a result of our continued investments, we have substantially debottlenecked our Permian system, improved our operating efficiency, reinforced our quality segregation capacities and capabilities and positioned our pipeline and terminalling systems in advance of our Cactus II completion later this year.

We're also building a new U.S. pipeline control center and related office facilities in Midland, Texas which will consolidate multiple offices in Midland and further enhance our communications and capabilities.

As illustrated on Slide 5, Cactus II construction is progressing on schedule with partial service to Ingleside expected to be complete in the third quarter of 2019 and full service to Corpus Christi expected by the first quarter of 2020.

With respect to the Wink to Webster project, we are at full speed ahead on progressing the project, which is targeted to be placed into service in the first half of 2021. We have ordered the majority of the long lead materials, including 36-inch line pipes. We've progressed our construction contractor strategy by awarding several key contracts with construction to begin later this year. As you may recall, the project is anchored with strong commercial support, and we continue to advance discussions with additional potential shippers and expect to be in a position to provide an update in the near future.

Beyond the Permian, we continue to advance several opportunities to leverage our existing pipeline systems and hub terminals. As shown on Slide 6, this includes the potential expansion and modest extension of our Diamond Pipeline, a reversal of the Capline system and an expansion on our Red River system. Each of these potential projects represent accretive, capital efficient growth opportunities. In aggregate, they would represent a modest level of incremental growth capital to our 2019 program. The binding open season for Diamond and Capline is expected to close today. And if there is sufficient support from the open season, we expect to move forward with the project.

With respect to Red River, we're in the process of finalizing shipper agreements supporting an expansion of the system. At our St. James hub terminal, we have sanctioned the construction of 2.4 million barrels of new crude oil storage capacity under a long-term third party contract targeted to be placed into service in the second half of 2020. This project will result in Plains operating more than 15 million barrels of crude storage capacity at St. James, which complements our existing connectivity, dock capacity and overall operating capabilities at one of the most strategic terminalling hubs along the U.S. Gulf Coast. Additionally, in Canada, we have sanctioned the construction of a new 50,000-barrel a day crude oil terminal serving the Marten Hills production area. This project is underpinned by long-term third party commitments and will bring additional volume to our Rainbow Pipeline system.

These are all great examples of attractive projects, attractive return projects that leverage our existing systems in core regions and enhance our operating capabilities and flexibility. We look forward to sharing additional updates on these efforts in the near future.

With that, I'll turn the call over to Al.

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Al P. Swanson, Plains All American Pipeline, L.P. - Executive VP & CFO of Plains All American GP LLC [4]

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Thanks, Willie. During my portion of the call, I'll share a brief recap of our first quarter results, updates to our 2019 guidance and growth capital program and provide an overview of our current capitalization, liquidity and leverage metrics. I will also address 1 accounting-related item.

We recorded first quarter adjusted EBITDA of $862 million, which represents a year-over-year increase of more than 45% and was driven by strong performance in our S&L segment. Our first quarter fee-based results of $583 million are summarized on Slide 7 and represent a year-over-year increase of 12% or 17% when adjusting for the impact of asset sales. The first quarter fee-based results decreased by 4% versus the fourth quarter of 2018. This was in line with expectations and was driven by lower volumes on certain pipelines resulting from narrower differentials and other factors, including onetime items and higher operating expense, including property taxes from assets placed into service.

As illustrated on Slide 8, we have increased our 2019 adjusted EBITDA guidance by $100 million to plus or minus $2.85 billion. This increase is driven by our S&L performance in the first quarter and is attributable to favorable regional basis differentials in both our NGL and crude oil businesses. That said, we continue to expect our S&L results in 2020 to be materially lower than 2019 as new pipeline capacity is placed into service and logistical constraints are alleviated.

Additionally, as Willie noted, we are increasing our 2019 capital program by $250 million, with $200 million as a result of sanctioning the St. James expansion, the Marten Hills terminal, several new complementary Permian projects and the new Midland pipeline control center-related office facilities. The remaining $50 million of the increase is associated with increased cost on our Cactus II project and scope changes on a few other projects.

Shifting to our capitalization and liquidity, we remain committed to maintaining that significant level of financial flexibility, retaining a level of cash flow that limits, if not eliminates, the need to issue common equity to fund routine growth capital programs and support metrics that are consistent with mid-BBB credit ratings over time. As of March 31, we had more than $3 billion of committed liquidity and capitalization metrics were within our targeted levels. In April, we lowered our targeted long-term debt to LTM adjusted EBITDA range by a half a turn to 3.0 to 3.5x, which assumes an S&L contribution normalized to the level we expect this segment to generate beyond 2019.

As illustrated on Slide 9, as of March 31, we reported a long-term debt to LTM adjusted EBITDA of 3.1x, which includes our recent S&L overperformance. We remain focused on continuing to migrate leverage down over time within our targeted long-term debt to LTM adjusted EBITDA range after adjusting for S&L over performance. Based on our updated 2019 guidance, we expect to exit the year with full year distribution coverage of more than 190%, cash flow in excess of distributions of approximately $970 million and per unit results that exceed our prior expectations.

Before turning the call back over to Willie, I wanted to share a few comments on an accounting-related matter. During the first quarter, we recognized a noncash gain of $267 million due to a fair value accounting adjustment required as the result of the decision by the Capline owners to convert the Capline ownership structure from a joint ownership arrangement to a limited liability company structure. We have treated this gain as a selected item in our adjusted results.

With that, I'll turn the call back over to Willie.

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [5]

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Thanks, Al. So we're on track with each of our goals for 2019. A summary of our goals and key takeaway from today's call are shown on Slides 10 and 11. Execution focus, optimizing our assets to improve returns and capital discipline are central themes throughout the updates that we shared today. Additionally, we continue to focus on additional asset sales and strategic joint ventures. Proceeds from these transactions, along with any S&L excess profits, will be used to fund capital or reduce debt. We expect the rest of 2019 to be very active as we continue to execute our plan and position the company for the long term. We look forward to sharing additional updates with you in a more detailed discussion at our upcoming Investor Day on June 11 in New York.

With that, I'll turn the call over to Roy.

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Roy I. Lamoreaux, Plains GP Holdings, L.P. - VP, IR & Communications [6]

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Thanks, Willie. (Operator Instructions) Additionally, Brett Magill and I plan to be available this evening and tomorrow to address additional questions. Hannah, we're now ready to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go first to Jeremy Tonet with JPMorgan.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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Just want to start off with Cactus II pipeline, if that's okay. Want to see how things are progressing there and thoughts on timelining when that could get partially and fully on service. And some of the competing pipes out there I think had mentioned some inflationary cost pressures, so just wondering if you have anything to comment on if you're seeing that.

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [3]

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Jeremy, this is Willie. Let me start with this and I'll ask Chris Chandler to chat a bit more about that. So Cactus II is on schedule. We expect to have that in service Q3 of 2019 for the first phase and the second phase in the first quarter of 2020. And we have had some cost creep but I'll let Chris address that.

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Chris R. Chandler, Plains All American Pipeline, L.P. - Executive VP & COO of Plains All American GP LLC [4]

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Sure. Thanks, Willie. This is Chris. We are seeing some cost pressure on both the material and labor side of the project. As you would expect, there's multiple pipelines being installed in the area and there is quite a bit of competition. But our total forecast for the Cactus II project is consistent and within about 10% of our budget for the project.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [5]

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That's helpful. And just turning over to Capline, was wondering, the change in ownership structure here, if that has any impact on what the reversal project as far as if the governance changes, does that mean that the scope of this project could change? And is there anything in your CapEx budget this year for Capline at this juncture?

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Al P. Swanson, Plains All American Pipeline, L.P. - Executive VP & CFO of Plains All American GP LLC [6]

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So the first question on the governance piece, it was necessary to convert to a partnership to conduct a joint open season. Historically, it's been under a JOA, which we had 3 undivided interest owners which is effectively 3 pipes within a pipe. So it was just necessary from a conversion and conducting an open season to have 1 tariff and to go to the market with 1 offering. As far as capital goes, Capline will get sanctioned. Within the budget now is just associated with shutting down the pipeline and purging the pipeline. Going forward, it will require commercial support. And as Willie said in his prepared remarks, we're evaluating the open season which closes today, and as soon as we have something to report, we will.

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [7]

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Jeremy, we've given guidance before on the project being roughly $250 million net to us. If we go forward with it, it'd be a fairly modest amount in 2019 with the majority of the dollars being spent in 2020, 2021.

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Operator [8]

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We will go next to Shneur Gershuni with UBS.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [9]

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For the most part, it's a pretty straightforward quarter and so forth. I was just wondering if we can spend some time talking about, for starters, your dividend guidance of plus 5% for '20 and '21. Is that where you expect fee-based earnings to grow in the '20, '21 period? What can we read from that guidance?

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Al P. Swanson, Plains All American Pipeline, L.P. - Executive VP & CFO of Plains All American GP LLC [10]

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Sure. I wouldn't read that into it. We -- as I commented, we have a 190% coverage, and so we didn't try to link that to any specific item. We did -- our looking at what we think our CapEx program will be and leverage and migrating it down, but we weren't linking that to a cash flow or a DCF type of growth number.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [11]

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So there's no readthrough with your 8% growth rate in fee-based declining down? There's potential for it to be higher than that? I mean is that one way to think about it?

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Al P. Swanson, Plains All American Pipeline, L.P. - Executive VP & CFO of Plains All American GP LLC [12]

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Yes, we haven't guided 2020, 2021 EBITDA growth. Again, what we wanted to do was to communicate that don't expect another 20% next year of growth when you're sitting with 190% plus coverage this year...

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [13]

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On the distribution.

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Al P. Swanson, Plains All American Pipeline, L.P. - Executive VP & CFO of Plains All American GP LLC [14]

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On the distribution.

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [15]

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Shneur, this is Willie. I think the other piece of it is just, we've got CapEx that we're spending. We just want to ensure that we can cover the equity portion of the CapEx over that period of time.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [16]

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Right. Okay. And maybe that sort of leads into a follow up question. I mean, part of your earnings driver this quarter is obviously S&L, which is viewed as temporary at times by you guys. But in general, I was wondering if you could sort of talk about the lower leverage target that you put out there. Were the agencies pushing for it? Because it's not something that we had seen out there? And maybe if you can sort of talk about the excess earnings from S&L as a potential source for buybacks on a go-forward basis. Is that kind of a way to be thinking about it? Just sort of if you can sort of talk about the pieces to the puzzle there.

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [17]

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Al, why don't you take that?

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Al P. Swanson, Plains All American Pipeline, L.P. - Executive VP & CFO of Plains All American GP LLC [18]

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Yes, clearly, our leverage target and bringing it down was part of the view of what made the most sense for how we want to run the company, how investors were looking at the company, how rating agencies were looking at the company. Shneur, what you got to remember is our target of 3.0 to 3.5x for long-term debt to adjusted EBITDA. We do incur short-term hedged inventory debt, and we do have preferred securities that have a 50% kind of debt component in the rating agencies' eyes. So on a kind of normalized basis, you got to allow for that. So if you looked at the 3 to 3.5, took the midpoint, those 2 adjustments can sometimes add up to 0.75 turns, so that would be roughly a 4. Most of our large-cap peers are either targeting something close to that or are already there. So no one kind of entity kind of nudged us to it, but we think it's prudent and we think we need to be a mid-BBB entity. I do think longer term, your comment about S&L as we get to where we want to be financially would provide a source of funds for an opportunistic share repurchase and/or funding capital or reducing debt further to create dry powder. But we're a little bit away from that. This particular cycle where we're seeing stronger S&L, it's really going to fund capital program and reduce debt.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [19]

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The prudency makes perfect sense.

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Operator [20]

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We'll go next to Gabe Moreen with Mizuho.

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Gabriel Philip Moreen, Mizuho Securities USA LLC, Research Division - MD of Americas Research [21]

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If I could ask a little bit, Exxon is out there talking about upsizing accelerating plans in the Permian. You've talked a little bit about, I think, you're partnering with them on long haul things. Can you talk a little bit about to what extent you might be working with them on gathering at the intra-basin side of things?

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Jeremy L. Goebel, Plains All American Pipeline, L.P. - EVP of Commercial of Plains All American GP LLC [22]

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Gabe, this is Jeremy Goebel. We can't speak on particulars about how we're working with them in the basin, but clearly we're aligned on -- with Exxon commercially on the long-haul projects, and that does present other alternatives from a marketing or a intra-basin standpoint.

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Gabriel Philip Moreen, Mizuho Securities USA LLC, Research Division - MD of Americas Research [23]

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Okay. And then maybe if I can ask on the Wink to Webster project. It sounds like you're reasonably optimistic about signing additional customers. Can you speak to maybe the return profile on the project? Would you ever need to maybe upsize it if you sign up additional customers in terms of -- from a CapEx standpoint?

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Jeremy L. Goebel, Plains All American Pipeline, L.P. - EVP of Commercial of Plains All American GP LLC [24]

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Gabe, this is Jeremy again. I would say that the 36-inch pipeline, as we stated in January, the pipe's been ordered. And the initial scope and budget that we put out was for full mainline capacity, which could be up to 1.5 million barrels a day, but it's greater than 1 million barrels a day. And we would expect to continue to talk to shippers, committed shippers, and potentially equity partners in the pipeline, but we're in the midst of those discussions now and prefer not to speak to that at this point, but we feel the project will be successful and well in excess of our minimum returns.

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [25]

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And Gabe, this is Willie. I think you're thinking about it correctly. Remember, we sanctioned the project with adequate commercial support and that would be consistent with our 300 to 500 basis points over weighted average cost to capital. So hopefully, if we are able to get additional people on the project, it not only serves as a good project for them, but it increases the return of the project beyond that.

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Operator [26]

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We'll go next to Justin Jenkins with Raymond James.

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Justin Scott Jenkins, Raymond James & Associates, Inc., Research Division - Senior Research Associate [27]

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Willie, I want to start with maybe a more macro oriented question here on crude quality and it's something we get quite a few questions on. Maybe just thinking about how API gravity's changed in the Permian over the past few years and the challenges or opportunities that, that presents for you guys and the industry as a whole.

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [28]

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Yes, I'll start with this and I think maybe Jeremy and/or Chris can add and certainly Harry can add as well. We've been a pretty big proponent of making sure we're talking about quality. If you think about the projects that we have built and continue to build, it's really around 3 things. It's flow assurance, it's quality -- maintaining the quality of the segregation and access to markets. And I think what you're seeing now is over the last number of years, the API gravity has gotten lighter and lighter. And in our view, we've started to hit limits where the U.S. refiners have started to push back, and it doesn't make as much sense to run the light barrel in their facilities. And to that point, you're starting to see more price transparency around Midland with the light barrels, including the addition of an additional marker out there called WTI Light, which will give a little more transparency to the pricing. And the reason I tell you all this is, again, if you got a system that is built for segregation, I think that's going to be a more important component going forward of being able to make sure we maintain the segregations of the different crudes to be able to get it to market and preserve quality of all the basins -- all the barrels in the basin.

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Justin Scott Jenkins, Raymond James & Associates, Inc., Research Division - Senior Research Associate [29]

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Perfect. And I guess follow-up question is probably for Al. How do we stand here today in terms of where the kind of portfolio optimization process is and maybe if we're targeting anymore incremental asset sales throughout 2019 and beyond?

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Al P. Swanson, Plains All American Pipeline, L.P. - Executive VP & CFO of Plains All American GP LLC [30]

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Yes, I think Willie touched on it, but yes, we continue to try to manage our portfolio, look for opportunities to either sell assets or bring in partners that can support them, that buy into a part of an asset and bring volume to it. So we're continuing that. But we aren't setting a specific dollar target. We don't believe -- we did for a couple of years when it was more to help explain how we were funding things, but nothing's changed as far as our approach and our discipline around that. We think it's a very positive way to challenge our business, and we continue to do so.

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Operator [31]

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We'll go next to Michael Blum with Wells Fargo.

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Michael Jacob Blum, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [32]

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I guess first question is just, I think you addressed Capline, but in terms of assuming Diamond expansion and Red River both move forward as FID projects, would that materially impact your 2019 CapEx? Or that spend be more in 2020?

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [33]

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Michael, this is Willie. For 2019, it would be a modest increase to the tune of, between the projects, maybe $100 million to $150 million order of magnitude, just to give you some perspective, and the majority would be in 2020.

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Michael Jacob Blum, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [34]

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Great. And then second question was just on S&L. So I guess prior quarter, you're giving guidance, you had said you had locked in the majority of that with hedges. Just trying to understand the outperformance here. Was that up, above and beyond what you hedged? Is it in Canada? I just want to get a little more details on exactly what transpired during the quarter.

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Al P. Swanson, Plains All American Pipeline, L.P. - Executive VP & CFO of Plains All American GP LLC [35]

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It's some of both. We didn't fully hedge, but we had -- what we are trying to say on the last call was we're comfortable with our $350 million partially due to the fact that we had hedged a substantial amount of it. But we don't hedge 100% of things where operational upsets could cause volumes not to move, that type of thing. We did see stronger NGL performance as you alluded to.

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Operator [36]

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And we'll go next to Dennis Coleman with Bank of America Merrill Lynch.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [37]

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If I could start with just one detailed point just because a lot of these open seasons seem to conclude with an extension of an open season. Did I hear it right, that the open season for Capline closed -- did close? It won't be extended?

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [38]

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We should probably let the operator speak to that, but it's our understanding that we have closed the open season.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [39]

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Fantastic. That's good news. I guess, just maybe 1 other question on the $250 million of projects that you added. Maybe I missed it, but did you give any -- I mean, what's the time line on some of these things? Is it -- are they short-term projects? Will they impact 2020 earnings? And can you give any -- speak to any kind of return metrics that we might use?

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Chris R. Chandler, Plains All American Pipeline, L.P. - Executive VP & COO of Plains All American GP LLC [40]

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Sure. Dennis, this is Chris. Al covered the details in our prepared remarks but just to recap, we're investing in an additional 2.4 million barrels of capacity. Our St. James terminal, that's about 6 tanks, backed by third-party commitments. We have a new terminal being built in the Marten Hills region of North-Central Alberta that will place volume into our Rainbow Pipeline. And then we have several complementary Permian projects. So timing with those would be a typical 18 to 24 months, and returns would be consistent with 300 to 500 basis points above cost of capital.

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Operator [41]

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And we'll go next to Jean Salisbury with Bernstein.

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Jean Ann Salisbury, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [42]

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Can you remind us how much of Cactus I is sold take-or-pay assuming that the Trafigura take-or-pay moves to Cactus II?

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Jeremy L. Goebel, Plains All American Pipeline, L.P. - EVP of Commercial of Plains All American GP LLC [43]

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Jean Ann, this is Jeremy. We don't publicly disclose that, but we're actually looking to continue to back that site. I wouldn't necessarily look at it -- because it comes off, nothing comes back in. We have substantial commitments in the field, and it's a question of do you convert them from Midland to Gulf Coast basis. So we have lots of opportunities to fill that space with or without specific shippers.

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [44]

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Remember, Cactus 1 was placed in service a long time before we had any discussions with Trafigura, so it was -- it had meaningful contractual commitments upfront.

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Jean Ann Salisbury, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [45]

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Yes, I feel like you -- maybe it's just old information but I feel you disclosed 2 45 right before Trafigura or another 100, but maybe that information is old. I was just seeing if that was still the case but...

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [46]

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No, there's -- Jean Ann, there's been things that have been in and out since then so it's kind of a stale number. That's all I'm trying to get to.

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Jean Ann Salisbury, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [47]

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Okay. That's fair. And then as a follow up, over the past few years, private equity has obviously been very active in Permian midstream. Many observers believe that, that was putting pressure on margins and gathering. Can you discuss whether you're still seeing that pressure from PE? Or it is it easing up a bit now that people have kind of figured out where they're playing?

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Jeremy L. Goebel, Plains All American Pipeline, L.P. - EVP of Commercial of Plains All American GP LLC [48]

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Jean Ann, this is Jeremy. It depends on your area in the basin. I would say the closer to Midland you are, the more competition you'll see from a gathering standpoint. You'll see more competition from a margin standpoint, which is why, honestly, we focus a lot out West and it's a larger pull through for our business. But I'd say that depending on the area, you see different pressures from different either strategics or private equity. Certain customers are more open to working with private equity backed teams and there the competition's more intense. Certain of our customers that we aligned with, you don't necessarily see that pressure because they want an industry partner. So I'd say it's not ubiquitous. We see the same competition everywhere. So we spend a lot of our business development time and opportunities where we can win and not necessarily have to compete directly with that capital. But certainly there's areas where we just are not competitive because what they're willing to do is inconsistent with some of our investment philosophies.

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Operator [49]

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And we'll go next to Colton Bean with Tudor, Pickering, Holt & Co.

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Colton Westbrooke Bean, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research [50]

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So just to follow up. You noted that the wider spreads drove some benefit to the NGL business this quarter. So how are you guys seeing that play out over the next couple of years here with Ridley Island starting up, I guess, (inaudible) next couple of months and then Prince Rupert coming on next year, do see any impacts to the NGL marketing business?

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [51]

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Harry, you want to take that?

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Harry N. Pefanis, Plains All American Pipeline, L.P. - President, Chief Commercial Officer & Director of Plains All American GP LLC [52]

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Sure. So yes, so [all those sort of], the more infrastructure you develop, the more takeaway capacity that exists. So I think it complements sort of the growing production of North America. We've really sort of streamlined our business. We think going forward, you'll see more stability in the margins and not quite the volatility. So that means whilst not as much downside, it does take away some upside opportunities as well. So I think it's probably going to be more of a factor of the way we've streamlined our business and historical volatility. Long way of saying, those assets will create more takeaway capacity for the growing production in North America, but we think we'll see more stable earnings in our NGL business.

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Colton Westbrooke Bean, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research [53]

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So implicitly, the business going forward has less sensitivity to overall basis spreads than maybe it did in the past?

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Harry N. Pefanis, Plains All American Pipeline, L.P. - President, Chief Commercial Officer & Director of Plains All American GP LLC [54]

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Correct.

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Colton Westbrooke Bean, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research [55]

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Perfect. And then -- so just on Facilities, pretty strong contribution here in Q1. How are you thinking about that in regard to the full year guide? And just on a related note, there's been quite a bit of discussion around an increasingly tight frac market in Edmonton, so any thoughts you have there would be helpful.

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [56]

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Harry, I'll take the first part, maybe you take the second part on the frac market. But yes, our Facilities segment, we did have a strong quarter following last year, we had a pretty strong year. We've seen excess throughput, we've seen some gains in the terminals. We have a tendency to try not to reforecast some of that because you don't know if they will recur at the same volumetric contribution. So hopefully, the business continues to perform higher than our guidance, but we're not certain of that so we chose to kind of leave it flat. I'll let Harry take the second part of it.

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Harry N. Pefanis, Plains All American Pipeline, L.P. - President, Chief Commercial Officer & Director of Plains All American GP LLC [57]

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So we have seen a tightening in the frac capacity at Edmonton. I think it's been reflected in our guidance. We see higher rates this year on recontracting than we saw last year. But most of the capacity is contracted on 1, at least 1 year terms. A lot of it is multiyear terms as well. So I wouldn't take that to mean that you'd see much upside in our guidance in the Facility section because a lot of that was baked into our forecast.

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Operator [58]

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We'll go next to Chris Sighinolfi with Jefferies.

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Vikram Bagri, Citigroup Inc, Research Division - Former Senior Associate [59]

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This is Vikram Bagri for Chris. I wanted to understand the minor decrease in volume guidance for S&L. Was it driven more by changing producer budgets or more competition in the basin? And then more broadly, your peers have talked about basin getting over piped. We -- our analysis also shows that on crude site basis, Permian basin will be over pipe for some time and tariffs have been going down. How do you see that situation evolving? Is there some repurposing that can take place in the basin? Or how do you see that situation evolving over time?

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [60]

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Al, why don't you take that?

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Al P. Swanson, Plains All American Pipeline, L.P. - Executive VP & CFO of Plains All American GP LLC [61]

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I'll take the first part and I don't know if Harry or Jeremy take the second part. But the volume on S&L that you're seeing down roughly 85,000 barrels a day is virtually all NGL, and it's the streamlining that Harry mentioned. We chose to take a different view on contracting going forward. Again, back to the stability and that Harry just walked through. So that's what really drove the volume change.

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Harry N. Pefanis, Plains All American Pipeline, L.P. - President, Chief Commercial Officer & Director of Plains All American GP LLC [62]

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On the longer-term Permian, to the extent that it does get over piped, the pipelines that have the strategic advantage and the competitive advantage on the upstream connectivity and sourcing of barrels and downstream, they'll stay full. The ability to segregate barrels, provide flow assurance and market options. The other barrels, the other pipelines that don't will look for other alternative uses, as you mentioned. Take the DJ Basin, for instance, the combining of the Saddlehorn Pipeline, the conversion of White Cliffs, that's an example of what a basin does when it gets long capacity. So you would expect things to happen in the Permian as well. No one sit's still in perpetuity. So you fully expect the industry to respond, and this is where you're over piped.

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Vikram Bagri, Citigroup Inc, Research Division - Former Senior Associate [63]

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Great. And then just as a follow up, when is St. James' storage coming on line, the additional storage that you're building? It seems like you're preparing for Capline reversal, so the date of that storage coming online will coincide when Capline comes online? And then if you can talk about whether this is -- you can expand storage for the -- and what kind of opportunities you will see once that decision is made and how much of a increase in CapEx or opportunities you may announce with the FID reversal of that pipeline?

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Harry N. Pefanis, Plains All American Pipeline, L.P. - President, Chief Commercial Officer & Director of Plains All American GP LLC [64]

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The first component -- this expansion is not tied, it's a separate customer that is likely not going to participate in Capline. It's just for local business. Any additional expansion (inaudible) tied to Capline's successful open season. And once we get the results of the open season, we'll be in a position to support it, but it's certainly favorable for the expanded dock capacity at St. James which we're recently expanding through 250 to 400. That can be complementary to that. We have an existing footprint in St. James that's capable of expansion for additional customers that have been wanting to export across that dock, and then the Capline dock and tankage could ultimately benefit, which we're owners in as well.

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Operator [65]

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We'll go next to Sunil Sibal with Seaport Global Securities.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [66]

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Just wanted to take a step back, and you know, from an industry point of view, seems like there's increasing impetus on the E&P side to consolidating Permian. I was wondering if you could talk a little bit about how do you think that impacts your business in Permian, especially when we think about the 3 legs, the gathering and the intra-basin and the long haul pipeline components of the business.

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Jeremy L. Goebel, Plains All American Pipeline, L.P. - EVP of Commercial of Plains All American GP LLC [67]

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Sunil, this is Jeremy. One, you would say that, that's generally positive because a lot of our customers, our larger customers looking for long-term partners in the basin. The flexibility of the system, they generally don't like to consolidate all in 1 particular market and have access to multiple markets. Quality control becomes important because they want to market the barrel and get the highest value for their product. So we're looking at a customer-friendly model towards the larger customers and intend to work with them. Several instances this year where there's been M&A in the last 12 months, those have been positive results for us. So if history is a measure of what it's going to look like in the future, we're happy with consolidation and things that plays to our strengths.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [68]

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Okay. Got it. My follow up was on Capline reversal. I was wondering, is there a certain minimum volume that you would need on the 40-inch pipeline for stable operations when you sanction the project for reversal of Capline?

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Jeremy L. Goebel, Plains All American Pipeline, L.P. - EVP of Commercial of Plains All American GP LLC [69]

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I would say that there's 2 components. There's a financial component and there's a safety and operational component and both of those will be guiding principles in how we commercialize the asset.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [70]

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Any good way to handicap from an operational perspective, what's the kind of flow you need?

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Jeremy L. Goebel, Plains All American Pipeline, L.P. - EVP of Commercial of Plains All American GP LLC [71]

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I think Chris and the team will work directly with the operator to make sure that we stay within something we're comfortable with.

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [72]

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Yes, we design the open season around making sure that we have sufficient flows to meet our standards around safety and engineering.

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Operator [73]

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We'll go next to Danilo Juvane with BMO Capital Markets.

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Danilo Marcelo Juvane, BMO Capital Markets Equity Research - Analyst [74]

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Some of your peers have recently talked up the importance of Houston as a market for crude logistics and certainly a market for exports and viewed Corpus as somewhat of a secondary destination. You've obviously have projects in pipelines going into both locations. Was just curious on what your thoughts are on Houston versus Corpus as a desired market for your customers.

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [75]

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[Dal], this is Willie. We believe in access to all markets. When you think about what I talked about flow assurance, quality segregation and access to markets, we want to give solutions to people to get to whatever markets they want to get to. And one thing that we found over the last year as we've developed some of these projects is, there's actually a preference sometimes to use 1 person's pipe and others' docks. So rather than a single solution where you have to go through a pipe and a dock, having the flexibility to get to other docs and as well as your own dock, I think gives the shippers the most flexibility possible.

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Jeremy L. Goebel, Plains All American Pipeline, L.P. - EVP of Commercial of Plains All American GP LLC [76]

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If you think about it, it's not like we're building a pipeline to a market and then hoping we'll get shippers to that market. The shippers are telling us where they want to go. So I'm certain there some shippers that prefer the Houston market and there are others that prefer the Corpus market. It would be hard to say that one is inferior to the other. The pipes are going to where the shippers want them to go.

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [77]

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And there's certainly attributes of both. If the marginal barrel had to get to the water and it can efficiently get there, one may be better than the other. If the intent is to sell to local refiners, it may be the other. Certainly, there's attributes of the Corpus ship channel or Ingleside that are preferential to docks inside. So I don't think it's one answer fits all. Once again, it goes to Harry's point that the shippers will dictate where they're most comfortable with and they view logistical advantages. In addition, a lot of these shippers are large enough to want exposure to multiple markets. They don't want a hurricane shutting their entire production field. So I think there's attributes of all and we're trying to create a mousetrap in the Permian Basin and the Mid-Continent that touches St. James, Nederland, Houston and Corpus to allow for the most flexibility, flow assurance and quality control, as Willie mentioned in the beginning.

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Unidentified Company Representative, [78]

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And Cushing.

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Danilo Marcelo Juvane, BMO Capital Markets Equity Research - Analyst [79]

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My second question, if I may, one of your owners at BHP is obviously going through a potential M&A transaction. To the extent that they try to sell down some of their ownership, does that impact you in any way?

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [80]

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No, it won't.

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Roy I. Lamoreaux, Plains GP Holdings, L.P. - VP, IR & Communications [81]

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I think we're -- maybe have time for 1 last question, Jeremy. I think you're in the queue, if I...

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [82]

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You get the prize, Jeremy.

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Operator [83]

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We'll go next to Jeremy.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [84]

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Just a couple of quick ones here. Thoughts as far as -- there's a lot of pipes originating at Wink, do you see the need for more and new commercial storage there especially on the segregation side given all the different grades that are coming through and producers looking to keep those grades separate. Just wondering if you see much storage be needed there and that being an opportunity for you.

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [85]

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Well, Jeremy has been chomping -- our Jeremy has been chomping at the bit to talk about this. Go ahead.

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Jeremy L. Goebel, Plains All American Pipeline, L.P. - EVP of Commercial of Plains All American GP LLC [86]

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Jeremy, good question. The answer is yes. I think you'll see the Wink will be the source for the aggregation point for most of the WTL and condensate. It will have export capabilities there. It will have capabilities to move to Midland. So we're creating that, but there's a need for operational storage, one for safe and reliability so as we move more and more volume through there and the Delaware Basin grows. I think operationally, the answer is yes. But commercially, there is the potential that it could develop into a pricing hub similar to Midland. And so you're going to see different pricing hubs develop in the Gulf Coast and you'll probably see some additional ones in -- as you've seen the pricing marker that will start in June but you've already seen some price discovery, as Willie mentioned, in the condensate. So you're seeing different grades show up from a pricing standpoint you can see different locations, both in the Gulf Coast and within the basins themselves.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [87]

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If I could finish one last quick one. Differentials in Canada have been coming in now, but just wondering what your thoughts were as far as crude by rail activity out of Canada and how that impacts you guys.

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [88]

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Harry, you do want to take that one?

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Harry N. Pefanis, Plains All American Pipeline, L.P. - President, Chief Commercial Officer & Director of Plains All American GP LLC [89]

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I'll take a crack at it. Listen, I think the incremental barrels going to have to move by rail out of Canada. So we continue to see rail movements out of Canada. As production increases, we think you'll see some more rail activity out of Canada until new pipes come in to service.

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Wilfred C.W. Chiang, Plains All American Pipeline, L.P. - CEO & Director of Plains All American GP LLC [90]

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Rail will be the governor and then the other piece is whether or not production mandates get -- production cuts get lifted or not. Thanks, Jeremy. Thank you, everybody, for joining the call. Thank you, Hannah, for your help today, and everybody have a safe evening. Thank you.

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Operator [91]

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That concludes today's conference. Thank you for your participation.