Feb 11, 2010
Executives
Greg Armstrong - Chairman & Chief Executive Officer Harry Pefanis - President & Chief Operating Officer Al Swanson - Senior Vice President & Chief Financial Officer Pat Diamond - Vice President of Strategic Planning Roy Lamoreaux - Director of Investor Relations
Analysts
Darren Horowitz - Raymond James Yves Siegel - Credit Suisse Ross Payne - Wells Fargo Michael Blum - Wells Fargo Brian Zarahn - Barclays Capital Selman Akyol - Stifel Nicolaus John Edwards - Morgan Keegan Michael Cerasoli - Goldman Sachs Adam Rothenberg - Zimmer Lucas Partners
Operator
Ladies and gentlemen, welcome to Plains All American Pipeline fourth quarter and year end 2009 results conference call. Today’s call in addition to reviewing the results of the prior period, participants will provide forward-looking comments on the partnerships outlook for the future, which may include such words as believes, estimates, expects and anticipates or other words that indicate a forward view.
The partnership intends to avail itself of Safe Harbor precepts that encourage companies to provide this type of information and directs you to the risks and warnings set forth in Plains All American Pipeline’s most recently filed 10-K, 10-Q and 8-K and other current and future filings with the Securities and Exchange Commission. In addition, the partnership encourages you to visit the website at www.paalp.com, and in particular, the section entitled non-GAAP reconciliations, which presents certain commonly used non-GAAP financial measures such as EBITDA and EBIT, which may be used here today in the prepared remarks or in the Q-and-A session.
This section of the website also reconciles the non-GAAP financial measures to the most directly comparable GAAP financial measures and includes a table of selected items that impact comparability with respect to the Partnership’s reported financial information. In reference during today’s call to adjusted EBITDA, adjusted net income and the like is a reference to the financial measures, excluding the effects of selected items impacting comparability.
Today’s conference will be chaired by Greg L. Armstrong, Chairman and CEO of Plains All American Pipeline.
Also participating in the call are Harry Pefanis, Plains All American’s President and COO; and Al Swanson, Plains All American’s Senior Vice President and CFO. Today’s conference will also include a Q-and-A session.
Instructions will be given at that time. As a reminder today’s conference is being recorded.
I would now like to turn the conference over to your host, Mr. Greg Armstrong; please go ahead, sir.
Greg Armstrong
Thank you, Cynthia and good morning to everyone. In addition to Harry, and I, and Al we also have several other members of our management team available for the question-and-answer session, including Pat Diamond, our Vice President, responsible for Strategic Planning; and Roy Lamoreaux, Director of Investor Relations.
As a reminder the slide presentation we’ll be referring to in this call is available on our website at www.paalp.com. Yesterday afternoon Plains All American reported fourth quarter and annual financial performance that exceeded the high end of our guidance range.
As discussed in our third quarter conference call, PAA’s asset base business model and financial growth strategy were subjected to a number of realized stress tests throughout which we have delivered solid performance. This trend continued in the fourth quarter and PAA once again delivered strong quarterly results that put a positive exclamation point on an already solid year, validating the balance that exists between our three segments and reinforcing the complimentary nature of our asset base and various business platforms.
Before we dive into the call I want to highlight the main change of our marketing segment to supply and logistics. This change is largely in response to a number of discussions we’ve had with both equity and debt investors over the last year or so.
The abbreviated versions of these discussions are the term marketing is commonly understood among our producer and refiner customers as deemed back-to-back margin business where we have no out right commodity price risk. Instead we are responsible for the logistics and supply related services that involve transporting, the crude or other product for the point of purchase to the point of sale and also for managing any timing or basis differences.
These activities involve not only specialized knowledge and skills, but also substantial use of various transportation assets, inventory and line fill, which are significant elements of the services we provide and represent considerable barriers to entry. For example, in addition to owning or leasing hundreds of trucks, barges, railcars and pipeline space, this segment also owns approximately 10 million barrels of crude oil, in LPG line fill that we classify as a long term asset.
This last element alone would represent an entry cost to a competitor of three quarters of $1 billion without factoring in the additional cost of associated infrastructure and related IT systems. Through discussions with members of the financial community, we now understand the initial perception of the term marketing is often considered synonymous with commodity price exposure, speculation and trading in the conventional Wall Street sense.
Over the last year or so, we conducted a number of informal polls asking whether it would be beneficial to change the name to something more descriptive of the fee equivalent logistics activities we conduct within the segment. The overwhelming response was where we should change the name.
Accordingly, we have renamed the supply and logistics segment. I would also mention as noted on the top half of slide three, our natural gas storage subsidiary PNGS has filed a registration statement with the SEC, but it has not yet become effective.
As a result both PNGS and PAA are subject to limitations on the information we can discuss in order to remain in compliance with rules and regulations regarding gun jumping. In order to avoid potential issues, we have modified the format and content of certain slides routinely provided during PAA’s conference calls to avoid specific information with respect to PNGS activities.
We request that today’s participants refrain from asking questions with respect to the details of PNGS activities until such time these limitations are no longer applicable. With that as a back drop during the course of today’s call we’ll be covering information that supports the four major points listed on slide four.
First PAA delivered another solid year of operating and financial performance and achieved each of the public goals we set at the beginning of 2009. Second over the past several years PAA’s orchestrated a significant positive transformation the Partnership that has substantially reduced its risk profile increasing the fee-based contributions from our transportation facility segment to well over 70%.
This information is further evidenced by this transformation is further evidenced by PAA solid’s performance during a period of significant volatility. Third we entered 2010 with solid credit metrics and ample liquid and are well positioned continue to execute our business plan and fourth based upon the investments made in 2009 and prior years our 2010 capital program and our continued acquisition activity we believe we are well positioned to grow our cash flow and distributions throughout 2010 and beyond.
Let us next focus on the results we released yesterday afternoon. As illustrated on slide five, for the fourth quarter of 2009 we reported EBITDA of $236 million and net income attributable Plains of $110 million or $0.52 per diluted unit.
Excluding selected items impacting comparability, which are included in the table at the bottom of the slide, our adjusted EBITDA was $275 million and adjusted net income attributable Plains was $149 million or $0.80 per diluted unit. These adjusted results represent increases of 17%, 23% and 8% respectively over the corresponding metrics of last years fourth quarter.
As presented on slide six, we also performed inline with our quarterly guidance marking 32 consecutive quarters of delivering quarterly results inline with guidance. These results were generated during a period of significant volatility and further reinforce the durable and predictable nature of PAA’s baseline cash flow stream.
As shown on slide seven for the full year of 2009 we reported adjusted EBITDA of $1.02 billion and adjusted net income attributable to Plains of $555 million or $3.14 per diluted unit. These results represent increases of 15%, 18%, and 7% respectively over similar measures for 2008.
Slide eight provides a summary of the four goals we set for 2009 along with a brief commentary in our performance relative to those goals. First as we previously described we delivered solid operating financial results during 2009, which after excluding the benefit of unforecasted acquisitions exceeded the high end of our original guidance for the year.
Second we consummated a total of seven acquisitions of fee-based assets for approximately $395 million, the largest transaction was the purchase of 50% equity interest in PAA Natural Gas Storage was Vulcan Gas Storage business under PAA’s control. The transaction included the purchase of Vulcan’s joint venture equity interest for approximately $215 million as well as the consolidation and refinancing of approximately $450 million of previously non-recourse joint venture debt.
As a result of this acquisition, PAA’s Natural Gas Storage capacity increased to approximately 40 Bcf with an additional 3 Bcf of lease capacity. The other six acquisitions totaled approximately $180 million with assets consisting primarily of fee-based pipeline and storage facilities.
We remain active and analyze in the variety of other acquisition opportunities across our business platforms. Third, given the state of the economy and capital markets entering 2009 we increased our already intense focus on maintaining and enhancing strong financial position.
As a result after investing approximately $760 million in organic and acquisition growth and consolidating approximately $450 million of previously non-recourse debt we entered 2010 with a strong balance sheet, solid credit metrics and approximately $975 million of committed liquidity. Fourth, we invested approximately $365 million in organic growth projects.
Given a tenuous state of the capital markets in early 2009 we maintained our financial discipline and demonstrated the flexibility of our portfolio of organic capital projects by scaling back our initial 2009 expansion capital program to $295 million. That was approximately 40% below PAA’s expansion capital programs in each of 2007 and 2008.
As the capital market improved we advanced additional projects. As Harry will discuss we have completed a number of strategic projects and set the stage for continued expansion at a number of our key locations.
I would point out that the combination of our organic and acquisition investments and I list to increase our distributions paid per unit in 2009 by 3.6% over distributions paid in 2008, while generating a healthy distribution coverage ratio of 114%. As of the distribution payable tomorrow, PAA will have increased its distribution in 21 out of the last 23 quarters.
I will address our distribution and growth outlook in my closing remarks. With that I’ll turn the call over to Harry.
Harry Pefanis
Thanks Greg. During my portion of the call I’ll review our fourth quarter operating results compared to the midpoint of our guidance issued on November 4, 2009, discuss the operational assumptions used to generate our 2010 guidance and discuss the progress of our expansion capital program and acquisition activities.
Let me begin with our operating results for the fourth quarter. As shown on slide nine adjusted segment profit for the transportation segment was $130 million or $0.50 per barrel, which is about $3 million below the midpoint of our guidance range.
The variance is primarily due to the fact that volumes were about 6% lower than forecasted and I’ll no that we’re forecasting 2010 volumes to be inline with full year 2009 volumes. Adjusted segment profit for the facility segment was $56 million or $0.30 a barrel which is about $5 million below the midpoint of our guidance range.
That variance from guidance related to a combination of items including Hub services at PNGS being about $1 million lower than forecasted and higher G&A expenses due primarily to a change in our segment allocations. Adjusted segment profit for the Supply & Logistics segment was $84 million or $1.09 a barrel which exceeded the high end of our guidance by approximately $19 million.
LPG margins were stronger than forecasted largely due to strong perfect demand for crop drying and heating. Segment volume for the quarter was inline with our guidance.
Maintenance capital expenditures were $25 million for the quarter and $81 million for the year. Expenditures for the year were approximately $9 million lower than the midpoint of our 2009 forecast due to combination of fewer required repairs and than participated and to project delays.
We’re forecasting maintenance capital expenditures for 2010 of approximately $85 million. Let me now review operational functions used to generate our full year 2010 guidance, which is furnished on Form 8-K issued last night and our shown on slide 10.
For the transportation segment we expect volumes to be approximately 2.9 billion barrels per day which is inline with our 2009 volumes. Segment profit per barrel is forecasted to be $0.49 per barrel which is also inline with our 2009 results.
Facility segment guidance is based on total capacity of 68 million barrels of oil equivalent, the 7 million barrel increased over the previous year results from a combination of a full period impact of acquisitions and growth capital projects completed in 2009 and the anticipated 2010 growth capital capacity additions. Segment profit per barrel associated at the midpoint of our guidance is forecasted to be $0.33 per barrel which is a 10% increased over 2009 results.
Supply & Logistics segment guidance includes lease gathering volumes of approximately 595,000 barrels per day, LPG sales volumes of 130,000 barrels from day, refined product sales of 45,000 barrels per day and waterborne foreign cargo volumes of 55,000 barrels per day. The sum of these volumes totaled 825,000 barrels per day with a projected midpoint segment profit of $0.83 per barrel.
Volumes are forecasted to increase by about 2% however the segment profit is expected to be lower as we do not expect to see the type of results we experienced in our LPG business in the fourth quarter of 2009 or the contango related profits we saw in the first quarter 2009. Since our November call we completed two acquisitions including the purchase of a 21% undivided interest in Capline from Shell, Chevron and Marathon with an approximate 43% ownership PAA is now the largest owner in Capline.
The second transaction was the purchase of a small Canadian pipeline that ties into our existing infrastructure. Looking forward, various major oil companies have been indicated that they intend to be or maybe willing to sell certain midstream assets that we believe will compliment our business model and asset base.
In this regard, we believe that the acquisition market will remain active. We have recently expanded our acquisitions group and we believe that we’ll continue to be well positioned to pursue strategic and accretive acquisitions.
During 2009 we invested approximately $365 million in organic growth capital and completed the final stages of Patoka Phase I and Paulsboro expansion projects. This total 2009 investment was about $15 million less than our $380 million estimate due to a combination of projects coming in under budget and some construction delays.
Our major project in 2009 included St. James Phase II, Patoka Phase II, Cushing Phase VII expansion projects all of which were supported by third party contracts.
Also, in Canada, we completed our Kerrobert pumping and connection project and the 143,000 barrel expansion of our Nipisi terminal. Moving to slide 11, our 2010 capital program totals approximately $360 million, approximately $93 million of capital associated with expansions in our Cushing, St.
James, Patoka and Wichita Fall terminals which are primarily supported by third party contracts. Under the 45 million associated with expansions of our pipeline gathering systems in West Texas and the Rocky Mountain Region.
About 17 million is associated with upgrades and improvements in our pump set LPG storage facility which will increase the capacity by approximately 700,000 barrels. The balance of the combination of small projects and capital committed to PNGS activities.
The expected in service timing is some of our larger projects as shown on slide 12. With that I’ll turn it over to Al.
Al Swanson
Thanks, Harry. During my portion of the call I’ll discuss our capitalization and liquidity, provide some observations on the transformation that has taken place at PAA over the last several years and discuss our guidance for the first quarter and full year of 2010.
We remain committed to a financial growth strategy that maintains a strong capital structure and significant liquidity to enable us to execute our growth initiatives. In 2009 we invested approximately 760 million in growth capital and consolidated and refinanced approximately 450 million of previously non-recourse project debt.
As summarized on slide 13 even with this level of investment, we exited the year with solid capitalization, approximately 975 million of committed liquidity, and credit metrics inline with our targets. At December 31, our adjusted long term debt-to-capitalization ratio was 49% and our total debt-to-capitalization ratio was 56%.
I should point out that the total debt ratio is burdened by 1.3 billion of adjusted short term debt that supports our hedged inventory. This debt is essentially self liquidating from the proceeds when the inventory is sold.
Additionally our adjusted EBITDA to interest coverage multiple was 4.7 times and our adjusted long term debt to adjusted EBITDA ratio was 3.8 times. Consistent with past practice, the long term debt utilized in these ratios has been adjusted to exclude 222 million of our three year senior notes utilized to fund short term hedged inventory.
This amount is included in our adjusted short term debt. The partnerships long term debt balance at year end was approximately 4.1 billion.
As reflected on slide 14, our long term debt principally consists of senior unsecured notes and has an average tenor of approximately 11 years. We have no maturities until July 2012.
We recognize that historically, floating rate debt is less each pensive than fixed rate debt. However given our cash based MLP structure our desire to protect the L.P.
distribution and the historically low interest rate environment, we have elected to minimize our exposure to increases in interest rates. In this regard, 93% of our long term debt is fixed at an average race of 6.2%.
Over the past several years we have orchestrated a transformation that has reduced our risk profile in a meaningful way. In 2003 and 2004, we achieved the critical mass and stability to earn our investment grade credit rating.
As listed on slide 15, since that time, we have increased our scale, expanded the scope of our operations, both geographically and by way of product mix, and also achieved and improved balance between supply driven markets and demand driven markets. Notably we have significantly increased the contribution from our fee-based transportation and facility segments.
We believe that collectively these achievements have substantially transformed the partnership and in the process lowered our risk profile. Slide 16 illustrates the significant expansion of our geographic footprint that has developed since 2004 and also provides an indication of the balance achieved between supply and demand driven markets.
Slide 17 highlights our current product diversity which includes refined products and Natural Gas Storage platforms that were added since 2005. Slide 18 highlights the significant growth achieved across a number of important operational and financial metrics.
Perhaps most notably, slide 19 focuses on the overall growth and adjusted EBITDA and the composition of that growth. As this slide illustrates based on our 2010 guidance since 2005, adjusted EBITDA has increased 155% while contribution from our fee-based segments have increased nearly 300%.
In 2005 contributions from our fee-based activities represented less than 50% of our adjusted EBITDA, for 2010 that numbers forecast to be 76%. The success of this transformation is evidenced by PAA’s results through the chaotic and volatile conditions that have existed over the last several years as we have discussed before, these conditions presented multiple real live stress tests.
Throughout the period of PAA has generated solid operating financial performance. I would also mention that during this period of time we have also added breath and depth to our management team.
We believe that the end result of this transformation is significantly reduced risk profile that benefits both our debt and our equity investors. Let me now move on to guidance.
We continue to maintain a cautious outlook for the overall economic environment. Although certain recent data may signal improvements in the health of the economy, other data indicate that we have yet to begin a sustainable recovery.
For example, one indicator of the strength and velocity of the economy that also has an influence on PAA’s business is energy consumption. Based on recent data, U.S.
demand for petroleum has declined by approximately 10% from levels experienced during the 2005-2007 time period and natural gas demand has declined approximately 2% to 3% relative to 2008. Although we expect the U.S.
economy will ultimately rebound and energy demand will return to a growth profile, these conflicting signals lead us to believe that significant uncertainty remains regarding the timing of the recovery, which translates into potential near term risk for the energy sector. Accordingly we believe it’s prudent for us to continue to position the partnership for a protracted economic recovery.
The highlights of our 2010 guidance which exclude selected items impacting compare ability between periods are summarized on slide 20. For more detailed information, please refer to the 8-K that we furnished last night.
For the full year of 2010 we are forecasting adjusted EBITDA to range from $1.015 billion to $1.065 billion with adjusted net income attributed to Plains ranging from $505 million to $571 million or $2.49 to $2.96 per diluted unit. First quarter adjusted EBITDA is expected to range from $250 million to $270 million with adjusted net income attributed to Plains range from $122 million to $147 million or $0.60 to $0.78 per diluted unit.
I would note that because of the seasonal effects, we typically see stronger results in our Supply & Logistics segment in the first and fourth quarters with slightly lower results in the second and third quarters. For illustration purposes, a representative quarterly profile for our 2010 guidance is included in the inset in the upper right corner of slide 20.
Similar to the preliminary 2010 guidance that we provided on November 4, the low end of our guidance range incorporates our view of a prolonged economic recovery from the recession, which in turn translates into a continuation of a weak U.S. economy throughout all of 2010.
Specifically, with respect to the energy industry, this outlook assumes that relative to levels prior to the recession, the U.S. will continue to see weak demand for crude oil and transportation fuels, reduced imports of crude oil and a weak market structure for crude oil with limited structural volatility.
Essentially, a market that is either slightly backwardated or slightly contango. This outlook also assumes as quality differentials remain at or near the abnormally tight range currently experienced in both the U.S.
and Canada. The high-end of our range assumes essentially the same outlook as the low-end of the range for the first half of the year, but incorporates a gradual recovery in the economy beginning in the second half of 2010 that will increase domestic consumption in crude oil imparts and results in an increase in structural volatility and expanded quality differentials for crude oil.
In summary, the midpoint of our annual guidance reflects somewhat weak market conditions for our Supply & Logistics activity including lower expected margins from quality arbitrage opportunities as a result of tighter differentials between grades and a relatively weak contango market structure. Our guidance also includes the impact of potential acquisitions on our results or our capital structure.
With that I’ll turn the call back over to Greg.
Greg Armstrong
Thanks, Al. I want to add a few comments to the 2010 outlook that Al just discussed.
We recognize that our economic outlook may appear to be conservative in comparison to the strength witnessed in the financial market since mid 2009, in that regard I would point out that to the extent the broad economic recovery actually begins earlier than we have anticipated or stronger than we have forecasted. There’s room for bias in this guidance range for both operating and financial performance and growth capital expenditures.
If the transition in the economy is relatively abrupt, it could also create volatility in market structure that could present attractive incremental opportunities for PAA given its asset base and baseline plus business model. I would also note that with our regard to any change in economic recovery, the baseline level of our adjusted EBITDA generating capacity as we exit 2010 will be higher than the average rate for 2010.
Almost irrespective of the economic environment, we will be working to advance a number of additional portfolio projects add to our $360 million of organic growth investment for 2010. Our growth will be further enhanced by future acquisitions, and we believe 2010 should be favorable for acquisitions, joint ventures and other significant events.
As Harry mentioned, we believe the acquisitions market will be active. In that regard having consummated 29 acquisitions for $4.5 billion over the past five years, we believe one of our strength is our ability to simultaneously evaluate, consummate and integrate multiple acquisitions of various sizes.
We have recently expanded our acquisitions group and we believe that, we will continue to be well positioned to pursue strategic and accretive acquisitions. We believe successful implementation of our organic growth capital programs in consummation of accretive acquisitions will underpin our future distribution growth.
Directionally, our future performance will be influenced by macroeconomic conditions, but the level of our distribution growth will be primarily impacted by three factors: The amount of our capital expansion, amount of our expanding capital, and acquisition expenditure relative to overall size, the results generated by such capital investments, and our overall cost of debt in equity capital. Similar to most public entities, our cost of incremental debt in equity capital is impacted by the total return expectations of our investors, which take into account their perception of our risk profile.
As Al discussed earlier, we believe our risk profile is much improved and has been stress tested. Relative to future distribution growth, some of the positive advances we have discussed today are partially offset by the increased cost of shorter term bank capital, the forecasted impact of income taxes to be imposed on all of our Canadian operations in 2011 and higher embedded capital costs related to long term financings completed in early 2009, that we incurred to position us for growth opportunities during this period of economic weakness.
Taking all these factors into account along with both the burdens and benefits associated with the law of large numbers, we are targeting an average annual distribution growth range of 3% to 5% for the next few years. Combined with our current distribution yield, this level of distribution growth provides a solid total return, which we believe given PAA’s lower risk profile represents an attractive risk reward profile for our investors.
Although we maintain a cautious economic outlook for 2010, unforeseen negative developments we are targeting to exit the year with an annualized distribution level of approximately $3.80 per common unit. Achievement of this target would represent a 3.3% increase over the 2009 annualized exit rate of $3.68 per unit and assuming ratable increases throughout the year would equate to approximately 3.5% to 4% growth over the aggregate distributions paid during 2009 of $3.62 per unit.
Finally, I want to review our goals for 2010. As shown on slide 20, these goals include delivering baseline operating and financial performance inline with our guidance, successfully execute our 2010 capital program and set the stage for continued growth in 2011 and beyond, pursuing a strategic and accretive acquisitions an increase in our annualized distribution level is $3.80 per unit by November 2010.
We believe we are well positioned to compete in the current environment. Throughout the year, we will continue to actively monitor the economic and regulatory environment and be on the look out for any necessary mid course adjustments we need to make to both protect and grow your investment.
We believe our expected performance in 2010, our solid capital structure and liquidity construction continue to make PAA an attractive investment opportunity that combines low risk profile with attractive current yield and positive outlook for future growth. Thank you for your participation in the call today.
We look forward to updating you on our activities on our first quarter call in early May. Prior to opening the call to questions I want to reiterate my earlier comments relative to our Gas Storage activity and remind you we will not be able to answer any questions related to PNGS.
Cynthia at this time we can open the call up for questions.
Operator
(Operator Instructions) Your first question comes from Darren Horowitz - Raymond James.
Darren Horowitz - Raymond James
Greg, a couple quick questions for you, on the heals of Al’s prepared remarks I know you’re modeling the existing tightness across the oil differentials to remain, but if the forward curve remains under 80 and even we can further. Does anything standout between grades as a larger cause of concern?
Greg Armstrong
Harry Pefanis
It’s probably $1.75.
Greg Armstrong
Darren, I think we modeled in the basement so to speak already, then TAPS differentials used average 450 range, they’ve been in the sub $2 range and so that’s built into our outlook. Again if that comes back stronger either because of economic growth or changes in the production profile of OPEC or other sources of crude that could go positive.
It’s hard to say thinking it goes that much more negative.
Darren Horowitz - Raymond James
Then just a couple quick regional questions for you as it relates to pipeline volumes. The first, the West Texas, new Mexico market specifically around Basin arrived about 6% better than your fourth quarter guidance but in your forecast, you’re expecting it to fall over 21% sequentially and arrive down about 9% year-over-year, but when we look at kind of aggregate West Texas, New Mexico area, the guidance it’s actually forecasted to bounce in a pretty healthy way sequentially.
What are you seeing in that market that’s driving this?
Greg Armstrong
Well, the fourth quarter was impacted by weak differentials in West Texas, which sort of crude out of the area driven by refinery demand in the area. Some of that’s seasonal so it’s hard to look at Basin on a quarter-over-quarter basis because there are some regional demand impacts that will affect how much crude is exported out of the area.
We are starting to see a little more volume being produced in West Texas and probably expect we’ll higher refinery runs next year than we saw this year, starting to see a little more crude move out on the Mesa/West Texas Gulf versus Basin also.
Darren Horowitz - Raymond James
Then final question on Capline, similar situation there, 4Q a little bit lower than what you’re modeling but you got a pretty healthy balance in the first quarter which makes sense given your acquired interest but then you’ve got it tailing off by about 19% for the full fiscal year. Is there something going on there in the Gulf Coast that’s pressuring differentials further than what you had previously been anticipated?
Greg Armstrong
When you look at Capline, we think that in the near term it will be negatively impacted by Keystone, which will come on second or third quarter of 2010. So we’re expecting that sort of in the shorter term that will take some volume off of Capline, but in longer term it’s a refinery sort of ramp up in the future, we think some volume increases in the Gulf Coast, we think you’ll see increased volume on Capline.
Al Swanson
Darren, I just might comment we’ve been asked a couple times why would you buy a Capline if you think volumes are back. We found it better to buy assets at the bottom than the top and if you recall we bought our first interest in Capline.
I think we bought it in 2003 right at the point in time we were expecting about 40% or 50% drop in volume and we think we can make money at that level and if we are correct about how the crude flows will adjust to changing both refinery and economic conditions, we’ll see those volumes. So I think we had actually forecasted about 117,000 barrels a day back in 2003 and we’ve been averaging 180 so I think the measure of that investment that we just made and we bought roughly the same interest in Capline in 2009 that we bought in 2003, but about a third of the cost is going to be measured where we’re at in about two to three years.
As you see some of the condensate volumes go up, Capline to meet some of the needs in Canada where you’ve got fewer up graders but more need, there’s going to be great opportunities there.
Operator
Your next question comes from Yves Siegel - Credit Suisse.
Yves Siegel - Credit Suisse
Greg, I was a little surprised when you said you expanded the personnel for the acquisitions. Can you expand on that just a little bit, especially given the fact that you’ve done such a, you’ve been so active in the past?
Greg Armstrong
Well, I think it goes with a couple of items. One we’ve expanded our product platform and I’ll just stop it there and tell you that we’re pretty active and we also just there’s a tremendous opportunity in the market if you will for quality talent because of some of the cutbacks that were happening at some of the financial influenced institutions.
So you had some really good talent and we do believe it’s going to be a very potentially active acquisition period for the next couple of years and so we wanted to be ready for it and so yes, I think we had great skills before but I think we’ve added really good people. The other thing is we tend to involve all of our operations and commercial guys in acquisition so if you’ll spread that out we need more people for them to coordinate.
Yves Siegel - Credit Suisse
Would you be willing to sort of rank the opportunity the different platforms?
Harry Pefanis
So I’ll just tell you we think we’ll be pretty active.
Yves Siegel - Credit Suisse
My last question, Greg, is when you think about distribution growth going forward, and if you mentioned it I apologize, but are you thinking about a certain coverage ratio as you go forward?
Greg Armstrong
We certainly have said in the past we’re comfortable in the 103% to 105% ratio and that’s migrated down some as we’ve lowered our risk profile. If we’re at the baseline level, we’re certainly comfortable with that range.
If we’re at the baseline plus, a little bit higher performance but volatility and some things where we can’t necessarily get comfortable that it would stay there, it’s great cash flow and its great capital but it’s not necessarily something we use to distribute. So that’s historically where you’ve seen the higher coverage ratios, so in that range is probably a target set, right now we’re forecasting 76% from pure fee-based activities and transportation and facilities and then in our Supply & Logistics there’s a big chunk of that is what we would call fee equivalent so I won’t say there’s no risk to our forecast but we think we basically got a good solid baseline in the coverage ratio in that range is going to be very comfortable.
Operator
Your next question comes from Ross Payne - Wells Fargo.
Ross Payne - Wells Fargo
Thank you. First question obviously Salt Lake looks to be up nice year-over-year if you can kind of refresh us on what’s driving that and second of all just your general thoughts on the sweet/sour differentials for 2010 relative to ‘09, and perhaps maybe also just touching base on your thoughts on the forward curve for crude?
Greg Armstrong
Right now, we’re basically forecasting a continuation of current type differentials until at least the latter part of 2010, Ross and there we see the economy starting to pickup and that should increase demand for petroleum products, which should start to cause some differentiation in the sweet/sour spreads and for that same reason that your question about the forward curve is kind of the same thing. At some point in time as the economy comes back, we’ll shift into a period of probably stronger backwardation as we go forward.
We’re just not forecasting it to show up any time near soon and the other thing I would point out and I tried to elude to it in my comments is if it’s an abrupt change or one that has fits and starts, it will probably create some pretty favorable volatility for our Supply & Logistics group and the assets and the business model that we have. We haven’t modeled that in here, but very few things have ever moved continuously from up and to the right.
They’ve always had fits and starts and again that type of volatility which affects both quality differentials and likely market structure would be a positive development for us.
Right now, we’re basically forecasting a continuation of current type differentials until at least the latter part of 2010, Ross and there we see the economy starting to pickup and that should increase demand for petroleum products, which should start to cause some differentiation in the sweet/sour spreads and for that same reason that your question about the forward curve is kind of the same thing. At some point in time as the economy comes back, we’ll shift into a period of probably stronger backwardation as we go forward.
We’re just not forecasting it to show up any time near soon and the other thing I would point out and I tried to elude to it in my comments is if it’s an abrupt change or one that has fits and starts, it will probably create some pretty favorable volatility for our Supply & Logistics group and the assets and the business model that we have. We haven’t modeled that in here, but very few things have ever moved continuously from up and to the right.
They’ve always had fits and starts and again that type of volatility which affects both quality differentials and likely market structure would be a positive development for us.
Ross Payne - Wells Fargo
Greg, one more thing, what are you seeing in terms of valuations today relative to maybe a year ago or two years ago?
Greg Armstrong
Valuations on?
Ross Payne – Wells Fargo
Acquisitions, yes.
Greg Armstrong
Relative to about 18 months ago, we were getting pretty close between buyers and sellers and the market came back rolling back. I think what’s happening is it just really hasn’t been a lot of transactions occur, so the gap is still there and there needs to be some movement from one side or the other.
Probably both sides will move because the cost of capital has improved, but at the same time you’ve got to find fundamental values and I think what we’re seeing there is probably not today is much competition because there’s not as much leverage available to some of the private equity players. If that comes back it will change things negatively for us so to speak.
It means capital will be available to us and it will be cheaper but we’ll have more people competing for the assets but practically speaking anybody that doesn’t have to sells not and until that gap starts to tighten a little bit. So I’d say it’s come in some, now where there’s not a big a spread but it’s still there.
Operator
Your next question comes from Michael Blum - Wells Fargo.
Michael Blum - Wells Fargo
Just I was going to ask you about storage and refined product on the crude oil side. What are you seeing trends in terms of rates?
Are those still increasing and within that do you have a certain percentage of your contracts that are rolling over each year and is that all baked into your guidance?
Harry Pefanis
The contract renegotiations are baked into our guidance. I think we’ve seen nice increases in the rates.
That’s sort of flattening out and most of our contracts are longer term in nature, so and we have contracts that rollover every year, but there’s not a one year period where we get a huge amount of re-contracting exposure.
Greg Armstrong
Yes, I think from an exposure standpoint Michael, if your question is if there’s softness in the market, are we subjected to it and the answer is some, but not very much because we tended to go with the customers that are more fundamental but use it regardless of the market structure. So when the market was extremely backward, if you look at the cushion you can see our tanks had quite a bit of crude in there at a point in time when everybody would say why would anybody be storing, and the answer is because there was basically volumes in transit that are servicing fundamental needs.
Clearly when the market was contango, everybody including our customers that use the crude were trying to take advantage of the market, but we didn’t chase what I’d call extremely high Wall Street values that were out there because we also knew that comes crashing back down. Then we have always tried to build effectively contract ladders the same way you build bond maturity ladders, so that we don’t have a lot exposed but as Harry said I think right now we still got some contracts that were as old and low rates that are coming up and we really don’t have any contracts of significance where you have high rates that are fearful of going down.
Michael Blum - Wells Fargo
My second question is your distribution growth guidance or target of 3% to 5% over the next few years little of your thought process on how you arrived at that range. Is that a function of what you think the market expectation is or is that just a function of what you think your business at this size can now generate and would the opportunity set that you see in front of you and your view of the macro and all that or just trying to get a little bit more insight into all that?
Greg Armstrong
Yes, I think you touched on several elements, all of which were considerations. We certainly try to stay in touch with what we think the market commands to be competitive, but it’s really more a function of our view of what we think we can do as we said there’s both benefits and burdens to the size issue, the larger you get it you can’t increase a compound growth rate of double-digits for very long before you pass into Exxon.
I don’t think Exxon is in danger from us right now, but we’ve grown quite a bit as I think some of the slides that Al showed you, and at the same time we’ve extremely lowered the risk. So if you truly believe in efficient markets and overtime, and risk rated returns, if you buy Plains today we are trading at about 7% yield and you get a midpoint of the guidance range of four.
You have 11% for what we think is a very attractive low risk investment. I’ve got a lot of my money, but going forward we certainly have some headwinds that we wanted to make sure all of our investors knew.
We’ve got certainly the tax issue that Al mentioned that starts in 2011. We’ve still got work to do in trying to exactly calibrate that, but we factored in the higher cost of capital.
For example, that what we built in to the capital structure last year when we did about $350 million, I think it was of 10 year notes at an 8.75 rate. At the time it was the right thing to do, but that’s about 300 basis points higher than what we could issue today.
So we tried to factor all that in so we feel pretty comfortable that with the portfolio of projects that we have and the acquisition level that we’ve always been able to maintain, we think we can step that up some, but we feel comfortable saying we’re in that 3% to 5% range. We have to execute but capital stays low maybe that improves a little bit.
As long as we don’t end up with a bunch of competitors out there driving the price of acquisitions up.
Operator
Your next question comes from Brian Zarahn - Barclays Capital.
Brian Zarahn - Barclays Capital
Harry touched a little bit on pipeline performance in the quarter but can you give a little bit more color on why it came in below your guidance? Was any refinery down times or unexpected?
What drove that?
Harry Pefanis
Some of it was Caplines which came in a little lower than we expected and some of it was really just on pipelines where we lease the capacities so the volumes were down but it didn’t really have an impact on our EBITDA, but the one that probably had the most impact on EBITDA was a Capline that was really just sort of refineries down during the quarter.
Brian Zarahn - Barclays Capital
Just to remind us in terms of the amount of capacity that leased it’s relatively small as a portion of your system?
Harry Pefanis
We just leased pipeline capacity, yes.
Brian Zarahn - Barclays Capital
Then in terms of you had a strong LPG margins in your new supply logistics in the segment. Are you seeing continued strong margins in the first quarter from propane?
Harry Pefanis
We are and that’s really reflected in the guidance that we have out there.
Brian Zarahn - Barclays Capital
Finally, on the potential M&A opportunities, what are you seeing outside of crude oil? Is there a large opportunity set?
Greg Armstrong
Yes.
Operator
Your next question comes from Selman Akyol - Stifel Nicolaus.
Selman Akyol - Stifel Nicolaus
First of all you guys talked about a 10% increase in the per barrel rate for storage and I’m wondering if that’s being driven by the low contracts that are coming off and you’re expecting them to renew at significantly higher rate?
Harry Pefanis
10% increase in segment profit is a combination of new tanks coming on at good rates but very low incremental operating expense and some of the other activities we have.
Al Swanson
It’s back to the benefits and burdens of the loss size, in this case we’re building on and bolting on to existing facilities and so the contribution to the bottom line is adding another tank or two on to an existing facility is disproportionately larger. Clearly, as we build these new tanks and as Harry has mentioned throughout his comments, a lot of these new expansions are supported by long term contracts, so we certainly matched the returns that we need to make on the capital we’ve expanded into that’s contributing to the bottom line.
We get the benefit on a relative competition basis of adding to an existing facility versus somebody that was trying to build a grassroots facility.
Selman Akyol - Stifel Nicolaus
Then last question, can you just remind me how much of your system is subject to the tariff adjustment on the transportation side?
Harry Pefanis
There’s a fair amount of the pipeline that are subject to the tariff adjustments but when you look at the pipeline we’re charging the max rate, it’s a lot lower and what do we have, Al like 1% decline is like $1 million EBITDA impact on us.
Al Swanson
So we don’t expect it to have a big impact, in fact in our guidance we actually forecast what we think the PPI plus 1.3 which maybe a minus in the starts in the middle of I think it is July 2010. So it’s not a big impact and just to clarify what Harry was saying is effectively we may have our maximum rate we can charge reduced but if we’re charging less than that we’ve got a lot of head room for it that affects our cash flow.
Operator
Your next question comes from John Edwards - Morgan Keegan.
John Edwards - Morgan Keegan
Did you comment given your distribution growth outlook, would it increase a little bit faster if you succeed in executing on acquisitions that you’ve staffed up for?
Harry Pefanis
Certainly in the near term if we were to, we don’t have into our guidance for 2010 acquisitions and so if we made an acquisition that started off contributing more we would look at that and say ghosh, do we need or do we want to increase the distribution. At that level it might be a function of how much capital do we need to raise and what do we need to do to best manage the capital structure and returns to our shareholders, and so I’d say there’s positive upside there.
As we go out farther clearly acquisitions are a part of our fundamental growth strategy so if it was one that we expected to do two years from now it might not change the overall trajectory, it just accelerates it if that makes sense. Big ones change things quite a bit and we’ve been averaging roughly about $300 million to $400 million a year for the last several years and so when we did Pacific and when we did link which was a relatively large one for us at the time there were step changes in those transactions.
John Edwards - Morgan Keegan
Then on the acquisitions, the expansion that you did, percentage wise or personnel wise, about how much larger did you look of increase did you actually implement on that?
Harry Pefanis
We’re pretty small acquisition group to start with, but it was the devil.
John Edwards - Morgan Keegan
So either very lien or…?
Harry Pefanis
We were pretty efficient and we just looked at it and said we think we’re going to be chasing a few more things and we want to make sure we’ve got the really good talent was out there and so we were able to attract it away from other areas that were previously hard to compete with so once we get them here we shack and to their desk so they can’t go anywhere.
John Edwards - Morgan Keegan
Then on this quarter, can you provide a little more detail on the $18 million adjustment in the logistics area I guess it was some sort of derivative activity?
Al Swanson
Yes, we adjusted the results as we’ve done all the time for mark-to-market activity on hedges, John, and if you look at it, I think it was $20 million in the quarter. If you look at the year, we took it the other way.
I mean its 58 million and so we were adjusting the other way. That’s non-cash adjustments on open hedges and principally they’re open hedges related around our inventory storage and so the 21 adjustments this year or this quarter that literally we’ve reduced the results, we’ve taken recorded results for the year and reduced them to what we think is a more normalized way that we should look at them, i.e.
on an adjusted basis with all the mark-to-market. If you go back and you look third quarters in a row you’ll see the same kind of adjustments both ways and they all tend to net out and the reason for that is they are basically economic hedges that just don’t get accounting treatment and so we always try to make sure our adjusted numbers reflect cash because that’s what we use through our distribution and not market.
If you recall back I think it was in 2008 we had a huge gain I think of $170 million that would have distorted EBITDA and we back that out the same way we basically take losses that aren’t real cash and we put them back in.
Harry Pefanis
Obviously in the fourth quarter prices increased net during the quarter and we have inventory hedges so we’ve taken the risk out of the price but we have to mark those hedges.
John Edwards - Morgan Keegan
Then the other category in transportation came in quite a bit lower quarter-over-quarter, was that similar, what happened in Capline or was there refineries down or what was report on there?
Al Swanson
Yes, part of the volume, Capline connects in the cap wood and cap wood and other, so part of that is direct and as I mentioned earlier, another part of it is we have some lease pipeline capacity that the volumes were down because the refinery demand as well and that didn’t really have much of a net impact yet.
Greg Armstrong
John, essentially what happens is they lease 50,000 or 60,000-barrels of space on the pipeline and they pay us the same rate whether they use zero or move 50 but we have to report the transportation volumes.
Operator
Your next question comes from Michael Cerasoli - Goldman Sachs.
Michael Cerasoli - Goldman Sachs
Can you just discuss the impacts both positive and negative to Plains of refining closures around the country in particular in the Gulf Coast?
Harry Pefanis
Yes, it’s really a two edge sure, I mean there’s certain things when there are refinery closures it causes a disruption in the supply chain and obviously inefficiencies in a supply chain, when you’re in the transportation business and you’ve got facilities can create opportunities. Longer term though Michael, it’s actually more beneficial for us to have all of our customers, and business and consumption going up.
So it can create short term abortions, longer term. If you look out and don’t bring those back on, then you’ll simply shift over to other refiners having to make more products.
If those refiners, the ones that shut down temporarily or permanently don’t come back on effectively, it just shifts things around which again causes logistical requirements that we certainly can help them, if they shut down because demand is down, and it never comes back that’s not good for any of us.
Michael Cerasoli - Goldman Sachs
Was there someone in particular you’re thinking about?
Greg Armstrong
Nope. Just in general.
Operator
Your final question comes from Adam Rothenberg - Zimmer Lucas Partners.
Adam Rothenberg - Zimmer Lucas Partners
I just wanted to see if your distribution guidance assumed that the PNGS, IPO occurs and how it changes, if it does or does not?
Greg Armstrong
I’m not sure I can answer it without stepping on a landmine, so I’d respectfully, Adam, just avoid the question if I could.
Operator
There are no other questions in queue. Please continue.
Greg Armstrong
If there are no other questions, we want to first just thank everybody for attending and also for their support, confident in investing in PAA whether as a debt or equity investor and we look forward to updating you at the end of the first quarter. Thank you.
Operator
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