Aug 5, 2010
Executives
Greg Armstrong - Chairman and CEO Dean Liollio - President of PNG Al Swanson - CFO
Analysts
Darren Horowit - Raymond James Brian Zarahn - Barclays Capital Stephen Maresca - Morgan Stanley Yves Siegel - Credit Suisse Michael Blum - Wells Fargo John Edwards - Morgan Keegan Michael Cerasoli - Goldman Sachs Adam Rothenberg - Zimmer Lucas
Operator
Welcome to the Plains All American Pipeline's and PAA Natural Gas Storage Second Quarter 2010 Results Conference Call. During today's call, in addition to reviewing the results of the prior period, the participants will provide forward-looking comments on the partnership's outlook for the future, which may include words such as believe, estimate, expect, anticipate or other words that indicate a forward view.
The partnership intends to avail themselves 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 and PAA Natural Gas Storage most recently filed prospectus 10-K, 10-Q, 8-K, and other current and future filings with the Securities and Exchange Commission. Throughout the call participants may reference the company's by their respective New York Stock Exchange ticker symbol of PAA or Plains All American Pipeline and PNG or PAA Natural Gas Storage.
In addition, the partnership encourages you to visit the website at www.paalp.com and www.pnglp.com, and in particular, the section entitled non-GAAP Reconciliation, which presents certain commonly used non-GAAP financial measures such as EBIT and EBITDA, which may be used here today in the prepared remarks and in the Q&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 compatibility with respect to the Partnership's reported financial information.
Any reference during today's call to adjust EBITDA, adjust net income and the like, is a reference to the financial measure, excluding the effect of selected items impacting compatibility also for PAA also references to net income or references to net income attributable claims. Today's conference call will be chaired by Greg L.
Armstrong, Chairman and CEO of PAA and PNG. Also participating in the call are Dean Liollio, President of PNG, and Al Swanson, CFO of PAA and PNG.
I will now turn the call over to Mr. Greg Armstrong.
Greg Armstrong
Thank you, Wanda and good morning and welcome to everyone. Before we get started, I would mention that Harry Pefanis, President and CEO of PAA, and Vice Chairman of PNG is on vacation with his family, but he's on the call and available for questions.
However to avoid potential communication challenges, I would cover the operational session of the call that Harry typically addresses but again he will be available for the question-and-answer session. In addition to Harry, Dean 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 will be referring to in this call is available on our website at www.paalp.com and www.pnglp.com. Yesterday afternoon, Plains All American reported second quarter performance within our guidance range.
Prior to diving into PAA's results, I will mention that last time we also released results or initial inaugural guidance on our 77% owned Natural Gas Storage subsidiary PNG. Beginning today, PAA and PNG will hold joint conference calls and additional members of PNG management will join us on the call to review PAA NG's operating and financial results and will also be available during the Q&A.
I will now turn to PAA's operating and financial results released yesterday afternoon. As illustrated on slide 3, for the second quarter of 2010, we reported EBITDA of $259 million and net income of $131 million or $0.65 per diluted unit.
Excluding the selected items impacting comparability, which are included in the table at the bottom of the slide, our adjusted EBITDA was $248 million and adjusted net income was $120 million or roughly $0.57 per diluted unit. In comparison to guidance, our overall results were near the top of the range and were highlighted by over performance in our fee-based transportation and facility segments and weaker performance in our supply and logistics business.
Adjusted EBITDA results for the second quarter of 2010 were up about 3% of our last year's second quarter. However, the net revenue mix changed with an 18% increased contribution from our fee-based segments.
Adjusted net income and adjusted net income per unit decreased 8% and 23% respectively due primarily to higher DD&A and interest expense, an increase in the number of units outstanding and the impact of the incentive distribution rights as they effect net income. Slide four graphically represents this quarter's performance versus guidance, highlighting the fact that we have now delivered 34 consecutive quarters of result in line with guidance, we believe that this consistent performance, which was delivered during the period of significant volatility serves as further reinforcement of the durable and predictable nature of PAA's results.
Last month we had incurred a 4.1% year-over-year increase in our distributions to $3.77 per unit on an annualized basis. As of the distribution payable next week, PAA will have increased this distribution 23 out of last 25 quarters.
We continue to target an annualize distribution rate of $3.80 per unit by year-end. I will now review our second quarter operating results compared to the mid point of our guidance issued on May 5, 2010, discuss the operational assumptions used to generate our third quarter guidance, and discuss the progress of our expansion capital program and acquisition activities.
Dean will cover the PNG specific information in a moment. Overall our second quarter operators were favorable to the mid point of our guidance.
As shown on slide 5, adjusted segment profits for the transportation segment was a $135 million or $0.48 per barrel, which totals about $9 million above the mid point of our guidance range. The primary driver of the favorable results was about $6 million lower operating expenses.
About $3 million of this is a timing difference in our maintenance and pipeline integrity programs that should be incurred during the second half of the year, transportation segment volumes were up about 5% of our mid point guidance, which helped generate revenue that was about $3 million higher than forecasted. The higher than forecasted volume and revenue amounts were primarily attributable to the Capline and range line systems.
Adjusted segment profit for the facility segment was $72 million or $0.35 per barrel, which was approximately $6 million above mid point guidance. Segment capacity was 70 million barrels per month.
This capacity was in line with guidance. The favorable results were due to primarily below operating expenses of PNG and lower than the forecast utilities and maintenance expenses.
Adjusted segment profit from the supply and logistic segment was $40 million or $0.56 per barrel, which was $6 million below mid point guidance and just above the low end of the guidance range. Although, there were several contributing factors to segment performance, the largest revenue variance was lower LPG volumes and margins, partially offset by higher than forecast gain on the sale of excess linefill.
Segment volume was approximately 790,000 barrels per day, were essentially on target with guidance with lower LPG volume largely offset by higher waterborne crude oil imports. Maintenance capital expenditures were $22 million for the second quarter and we continue to expect maintenance capital to run about $85 million for the entire year.
Let's move to slide six and review the operational assumptions used to generate our third quarter 2010 guidance, which was furnished in our Form 8-K issued last night. For the Transportation segment, we expect volumes to be approximately 3.1 million barrels per day and segment profit of $0.48 per barrel.
This volume is consistent with our performance in the second quarter. I would mention that our guidance shows an increase of approximately 75,000 barrels per day in the second half of the year versus the guidance we presented in May.
The bulk of this increase is due to increased volumes on Capline and Capwood in the West Texas area systems. Facility segment guidance assumes a total capacity of 71 million barrels of oil equivalents, which is up about 1 million barrels over the second quarter reflecting the full period benefit of capacity additions primarily completed in the second quarter at St.
James and Patoka. Mid- point segment profit per barrel is estimated to be $0.33 per barrel.
Supply and Logistics segment guidance volumes totaled 815,000 barrels per day with a projected mid-point segment profit of $0.60 per barrel. This guidance includes some benefits from contango during the quarter and reflects expected lower seasonal contribution from LPG sales.
As we indicated in our first quarter conference call and discussed at our June 10th Analyst meeting we have not experienced and material operational impact nor do we currently perceive any material or direct impact from the oil release in the Gulf of Mexico. That said, regulatory oversight of the industry in general is anticipated to increase.
Regarding capital projects, as shown on slide 7, we continue to project total organic growth capital investment of $360 million for the year and as shown on slide 8, our capital projects remain generally on time and on budget. We continue to see solid demand for new tank construction projects in our major market hub terminals as well as demand for additional takeaway capacity within several of our supplier basin and anticipate that we will able to be more definitive about some of the resulting projects in the coming months.
I would mention that we are continuing to pursue Pier 400 and we expect that it will fourth quarter before we have a better view for the path forward on this project. Lastly with respect to our acquisition activities, over the past several months we have entered into agreements on to close a few bolt on type acquisitions.
Total consideration paid and deposits made through the end of June, equaled approximately $150 million. We expect that we will be able to give additional color on the acquisitions in the near future.
I would also mention that we continue to actively evaluate opportunities in each of our operating segments. I will now turn the call over to Dean Liollio, President of PNG for an update on our gas storage activities.
Dean Liollio
Thanks Greg. In my part of the call I'm going to provide an update on PNG's activity, address our second quarter operating and financial results and also share a few comments about our third quarter guidance.
In addition to completing PNG initial public offering, the second quarter was a very active period for PNG operationally. Our overall capital program is on target.
We started this year with the 2010 program of approximately$95 million and despite a lot of activity and typical challenges associated with drilling operations, the cost reductions and cost increases that generally balance out. A recap of our capital program is included on slide nine.
At Pine Prairie, we placed Cavern Well 3 in to service early in the quarterly and dewatering operations were completed in July. Cavern Well 3 increased the total working capacity at Pine Prairie by 10 Bcf or approximately 70%, and increased PNG's total working capacity to 50 Bcf an overall increase of 25%.
We also commenced leaching on Cavern Well 4 and based on our latest one around in mid July, we have created 1.1 Bcf of Cavern space. Operations are running smoothly and we are currently on track to bring Cavern Well 4 into service in the second quarter of 2011 in the range of 7.5 to 8 Bcf of working capacity.
In early June, we completed drilling operations on Cavern Well 5 and expect to begin leaching operations in mid-August. We anticipate bringing Cavern Well 5 into service in the second quarter of 2012 at approximately 10 Bcf of working capacity.
Although we prefer when the hub services market is very active, we take advantage of a low and physical market activity during the second quarter to commence an unscheduled fill and dewater cycle on Cavern Well 2. This created an additional 4% of working capacity, increasing capacity from approximately 8.5 Bcf to around 8.9 Bcf.
The high performance capacity of Pine Prairie's leaching system gives us the flexibility to conventional leeching, fill and dewater operations simultaneously and at relatively higher rate. As illustrated on slide 10, the versatility of this system allows PNG to expand Pine Prairie at low cost and with a high level of certainty regarding the timing of planned capacity addition.
Including the addition of this newly created capacity, we currently have leased over 99% of our available capacity at Pine Prairie to a diverse mix of customers. In anticipation of bringing additional working capacity online in the second quarter of 2011, we commenced a non-binding open season for 2 Bcf of storage capacity at Pine Prairie, in late June.
The Open Season concluded in mid-July and was heavily oversubscribed. We received over 20 bids totaling approximately 25 Bcf, from a healthy mix of current and potential customers, with over 75% of the bids coming from new potential customers.
The results from the Open Season confirm strong volume metric demand for firm storage. As you can appreciate, because negotiations and discussions are on going with participants in the process, it is not to PNG's or its stakeholders' benefit to discuss specific pricing levels.
That said, given that customers are fully aware that seasonal spreads and cash to NYMEX spreads are weak right now, I don't feel uncomfortable communicating that the bid are at lower rates than we were contracting for three months ago,. This is partly due to the recent and rapid change in market conditions, including weaker spreads, which are simply the price differences in natural gas from the summer injection period to the winter withdraw period as well as customers looking for lower service levels.
We believe that change in spreads was driven by increased summer demand for natural gas due to a record 30%, warmer summer based on year-over-year population-related cooling degree days, today coupled with market confidence and ample winter supplies of natural gas. As I suspect, you have been hearing on some of the other conference calls, for MLPs, with natural gas infrastructure hub services in general have been negatively impacted by the decrease in locational price differences or basis.
Despite these recent headwinds, the upfront capital investments we have made early on at Pine Prairie give us the ability to construct incremental storage capacity at low cost enabling us to generate attractive economic returns in the current or even a weaker pricing environment. We also believe the certainty of service, interconnectivity and performance capabilities will continue to make Pine Prairie a preferred storage service provider for many years to come.
In this regard, as a part of our recent open season, we also solicited non-binding indications interest for additional capacity at Pine Prairie starting in 2013. Based on the solid response we received, we are making preparations to file an application at FERC to further expand Pine Prairie.
We currently anticipate filing this application by the end of the year and we will be able to provide you with some specifics regarding the proposed expansion at that time. At Bluewater, we completed the drilling of the new well designed to withdraw fluid from the reservoir that over time will expand the natural gas storage capacity of this facility by approximately 8%.
The storage space will be created whether the fluid withdrawn is formation water or hydrocarbon. The economics of this investment are attractive even if we recover 100% water, but we designed the well to be able to selectively produce oil if reservoir conditions are appropriate.
As it turns out, we were successful in completing the well as an oil producer that came online in early June, and is averaging over 140 barrels of oil production per day. As a result of trying to maximize the amount of oil ultimately recovered and thus optimize long-term cash flow, we are not withdrawing fluid as fast as we might otherwise and we expect the production rates to vary throughout the injection and withdrawal cycle.
Another notable development I want to mention is that effective June 1, Ben Reese join PNG as Senior Vice President, Commercial and Todd Brown joined as Vice President, Optimization in connection with the formation of PNG Commercial Optimization Group. The formation to this group is the significant milestone in the continued growth and development of PNG.
I've had the pleasure of working with both of these gentlemen previously and I am confident that they will add value to PNG. In addition to benefiting our unit holders by optimizing the value of our natural gas storage assets and related services, this group will also enable us to better serve our customers by providing them with increased liquidity and flexibility as well as problem-solving capabilities.
This group's activities will be similar to the low-risks hedged activities successfully employed in the crude oil business by PAA and will compliment PNG's basic commercial strategy of committing a high percentage of storage capacity under multi-year firm storage contract. The contribution from this effort above current base-line cash flows will take a while to development and incremental overhead costs will burden results for a few quarters, but we expect to achieve positive results in 2011.
Let me turn now to PNG's operating and financial results, which are summarized on slide 11. Yesterday, we reported second quarter adjusted EBITDA and adjusted net income of $14.2 million and $7.9 million, respectively.
Our firm storage business was in line with expectation. However, as discussed during PAA's first quarter conference call, our reported results included some transitional IPO-related and startup-related items associated with brining Cavern Well #3 online as well as lower than expected contribution from hub services activities.
Additionally, these results also reflect the impact of startup costs for the commercial team and the cost of marking the market and closing out at derivate position. Taking into account the affect of some one-time offsetting benefits, we estimate the net negative impact of these non-recurring items was approximately $1.2 million.
Our reported financial results also include the burden of nearly $475 million of higher cost debt due to PAA for the first 35 days of the quarter. Effective with the closing of the IPO on May 5th, this balance was reduced to $200 million, and the interest rate was reduced from 6.5% to around 3.2%.
The net impact on second quarter results of the higher debt balances and interest rates was approximately $1.9 million. At the end of the second quarter, PNG had total long-term debt of $205 million.
We believe the transitional issues are now behind us, and as a result, the third quarter should be PNG's first reporting period without significant non-recurring transitional item. In that regard, yesterday, we also filed an 8-K in which we furnished operating and financial guidance for the third quarter and second half of 2010, selected portions of which are summarized on Slide 12.
In general, this guidance reflects continued steady cash flows from our current portfolio of firm storage contract, but also incorporates our expectation of modest hub services profitability due to continued pressure on spreads and basis. In summary, although lower hub services rates will impact PNG's results in the near-term, hub services comprise less than 15% of total revenue, and as we have discussed, substantially all of PNG's working capacity is contracted for the 2010-2011 Storage Season at attractive rate.
Additionally, our assets are performing as designed. Our capital program is on time and budget, and we have a strong financial position.
These points are bolstered by the fact that we can build storage at low incremental cost enabling us to generate attractive returns even when term contract rates are under pressure. Even if current market conditions continue for a number of years, we believe that PNG is positioned to generate mid-single-digit organic distribution growth and provide an attractive total return proposition with acquisition upside.
Finally in regard to acquisitions, I would mention that although we are limited in the specifics, we can provide on past or current acquisition processes in which we have been or may be involved, we continue to remain very active in analyzing various potentially synergistic acquisition opportunities. With that I will now turn the call over to AL
Al Swanson
Thanks, Dean. During my portion of the call, I will discuss capitalization and liquidity for both, PAA and PNG.
PAA's guidance for third quarter of 2010, as well as briefly touching on current accounting issues involved in PAA, consolidating PNG after the IPO. As summarized on slide 13, PAA exited the quarter with solid capitalization approximately $1.2 billion of committed liquidity and credit metrics in line with our target.
The committed liquidity I had I mention, include approximately $195 million of availability under the PNG revolver. After the quarter end, we further enhanced our liquidity thorough the issuance of $400 million of 5-year senior notes, which closed in mid-July, the offering was priced to yield 3.98%, and provided $396 million of net proceeds.
We expect to use a portion of the proceeds to redeem our $175 million 6.25% senior notes due 2015. These notes are callable at 103 in September of 2010, and will result in an approximate $4 million annual interest savings.
As June 30, our adjusted long-term debt to capitalization ratio was 47% and our total debt to capitalization ratio was 55%. Including the reclassifying of the 500 million of notes used to fund inventory.
Our adjusted long-term debt balance is $3.85 billion. The total debt ratio includes $1.5 billion of debt that support our hedged inventory.
This debt is eventually self liquidating from the proceeds when we sell the inventory. For reference, our short-term hedged inventory at June 30 was comprised of approximately 22 million barrels equivalent with an aggregate value of $1.5 billion.
In addition to these inventory volumes and value, which we carry as a current asset, we also have approximately 13 million barrels equivalents of linefill and base gas carried as a long-term asset that has a historical book cost of $622 million. Our adjusted long-term debt to adjusted EBITDA ratio was 3.6 times.
As reflected on slide 14, our long-term debt primarily consists of senior unsecured notes at a average tenure of approximately 10 years. We have no maturities until September of 2012 and 93% of our long-term debt is fixed at an average rate of 6.2%.
Let me now move onto guidance that's summarized on slide 15. The third quarter adjusted EBITDA is expected to range from $240 million to $265 million with adjusted net income ranging from $106 million to $136 million or $0.47 to $0.68 per diluted unit.
Our full year 2010 guidance reflects an estimated 78% contribution from our fee-based segment. Following the IPO, PNG will continue to be a consolidated subsidiary of PAA.
As such its assets and results will be consolidated as reported in PAA's balance sheet and income statement. PAA consolidated earnings will be reduced by 23% of PNG's earning, which is the portion held directly by PNG public unit holder owners and not PAA.
This reduction is reflected on PAA income statement as net income attributable to non-controlling interest. A similar reduction for distribution to non-controlling interest will be reflected to determine PAA's distributable cash flow.
On the balance sheet asset, liabilities and debt will be consolidated into PAA balance sheet. The $268 million of equity proceeds raised in the IPO reflected in the equity section of PAA's consolidated balance sheet with a $167 million attributed to non-controlling interest and the remaining $101 million attributed to PAA's share of net equity.
This is effectively reflecting the book gain on the IPO. As shown on slide 16, PNG exited the second quarter with a debt to capitalization ratio of 23%, EBITDA to interest coverage of 5.1 times, and debt to EBITDA ratio of 3.4 times.
The debt to EBITDA ratio is calculated in accordance with the covenant in PNG's credit agreement, which includes pro forma adjustments for Cavern 3 which was placed in to service in the second quarter. PNG is committed liquidity with a $195 million at June 30.
This is subject to covenant compliance. Additionally, I want to provide a few comments relatively to the initiation of PNG's commercial optimization efforts that are being discussed.
We will utilize the same type of low risk asset-based optimization tools in PNG that we have effectively utilized in PAA's crude oil business. Our deal is to purchase only products for which we have a market to minimize our direct commodity price exposure and not to speculate on outright commodity price changes.
These activities are overseen by our risk management committee that is independent of the commercial function. These commercial optimization activities will require working capital that we expect over time maybe as high as $75 million.
However, we expect the requirements will be well below that level over the next several quarters. There is one final item I want to address before turning the call back over to Greg.
In Dean's remark, he addressed PNG's overall business, the recent market softness for hub services and PNG's guidance for the third and fourth quarter of 2010. In PNG's initial public offering documents, we included an estimate of the minimum, estimated, available cash from distributable cash flow for the 12 months ended June 30, 2011 which showed an estimated coverage ratio relative to the minimum quarterly distribution of 107%.
The primary variant impacting our guidance for the second half of 2010, as compared to the earlier forecast I just mentioned, is lower hub services revenue. Our guidance for the second half of 2010 reflects distribution coverage of less than 1:1.
This is in part due to the softer market condition but I would note that even in the initial estimate, we anticipated distribution coverage for the second half of 2010 to be less than 1:1, due to the fact that the significant driver for cash flow coverage for the one year period ended June 30, 2011 is the revenue additions associated with bringing approximately 8 Bcf of new storage capacity online in the second quarter of 2011. Accordingly, the distribution coverage for the last three months of our estimate for the 12 months period ended June 30, 2011 was meaningfully higher than the 107%.
We remain on schedule to bring that capacity into service in the second quarter of 2011, and although we are not yet providing guidance for the first half of 2011, we anticipate run rate distribution coverage for that same three months period, will be well above 1:1. As Dean mentioned previously even if the current market conditions continue for the next few years, we believe PNG can generate mid single-digit distribution growth driven by organic expansion at Pine Prairie, while maintaining a comfortable distribution coverage.
With that I will turn the call back over to Greg
Greg Armstrong
Thanks Al, before we open up the call for today's questions, let me quickly recap the major takeaway from this call. First, PAA delivered another solid quarter of performance versus guidance and is on tract to meet its targeted goals for the year.
Second we have solid credit metrics and ample liquidity and are well positioned to continue to execute on our business plan. Third, our consolidated capital program is progressing as planned and we remain active in pursuing incremental acquisition opportunities.
Then fourth and finally we believe PAA and PNG each provide attractive investment opportunities that combine a low risk profile, with an attractive current yield and a positive outlook for future growth. We very much appreciate your participation in today's call.
We look forward to updating you on our activities during our third quarter call in early November. At this time, we will be glad to open up call for questions.
Operator
(Operators Instructions) Our first question comes from the line of Darren Horowitz from Raymond James, please go ahead.
Darren Horowit - Raymond James
Greg, a couple of questions, first looks like Gulf Coast refinery utilization has picked back up, a little bit sequentially and we have also seeing some favorable moves in some crude differentials. Am I correct in assuming that those two things are really the main driver of Capline and Capwood, which strengthened the back half of this year?
Greg Armstrong
Those certainly are contributing factors. So I'm looking at our guys there.
I think it's that and we are into the driving season right now. So our people are cranking up runs quite a bit.
So, it's a combination of all those factors. We still expect Capline to kind of ebb and flow from time to time, but long-term clearly we've increased our interest in that pipeline.
We think its going to have a lot of activity many years after I'm not on this Earth.
Darren Horowit - Raymond James
Shifting over to West Texas/New Mexico Systems looks like volumes picked up ahead of which you were forecasting for the second quarter and you got an upward buy in to the back half of this year. Is that mostly driven by an uptick in Permian activity or to the extent you could provide more color there, we would appreciate it?
Greg Armstrong
There is a lot of drilling activity out in the Permian and it looks like its going to continue for a quite some time and I think also some time you will see some flows out there as we see the tanks build up and we go in to contango and out of contango those pipeline movements will shift. I think in the section Harry normally covers, he has not covered today.
A lot of our pipelines we are seeing in West Texas are at or near capacity. So, we are actually building new lines out there.
I think it's definitely consistent with your assessment that activity levels have picked up out there.
Darren Horowit - Raymond James
Last question for Dean to the extent that you can comment, as it relates to the acquisition landscape. Has there been any movement in the bid aspect for storage assets and also any change in the logistical strategy to move gas east possibly with the addition of complementary pipeline infrastructure.
Dean Liollio
Second part of your question, no change in that strategy that's still very valid. Your first question, most everyone saw the recent price paid for the most recent storage transaction at Bobcat, so I would just say that values are still very strong for storage out there.
Greg Armstrong
Darren, I might just add. I think, and it's quite easier to refer back to kind of E&P.
Anytime there is major move in commodity prices up or down, the buy/sell activity or the acquisition activity tends to pause a little bit, while people try to recalibrate what's going to be the new norm. We are seeing the market for hub services and spread.
For example, in May, Dean, correct if I'm wrong, but I think the seasonal spray was probably $1 or little bit over that, and recently we saw that as low as $0.47, I forgot, $0.42 or $0.43 on an intraday basis. So, if you equate that to kind of same type of issue when you have a rapid move in commodity prices.
I think there is a potential here for the acquisition process to drag out a little bit. I think seller are going to live in the prices of April, May, and buyers are going to want to move to the current activity levels and it will just take a while to sort of self out.
Probably this time next year we will look back and realize it was temporary, but while you are in it, it doesn't feel very good.
Operator
Next we will go to the line of Brian Zarahn from Barclays Capital.
Brian Zarahn - Barclays Capital
Can you give a little more color on the acquisition $150 million you mentioned, what type of assets?
Greg Armstrong
Unfortunately I can't at this point in time. It's kind of comments and they were intention a little bit why you will see we file 10-Q which I think it's going to file tomorrow.
We entered into some contracts and we put some deposits down, but those transactions haven't closed yet and our hands are pretty tied, Brian, from give a much more color at this point.. So, we did want to give you the heads up on this call that if you study the 50 or 60-page 10-Q, you will see that there is about a 150 million of transaction, but again as we've either entered into agreements and made deposits are so some small ones we have closed, so I would certainly suspect that when we have our next call, we can talk about it if not before then.
Brian Zarahn - Barclays Capital
Then on time period, Dean, you mentioned the rates are a little bit lower or you mentioned they are lower than three months ago. Can you give us a sense of order and magnitude?
Dean Liollio
Brian, I'd prefer not to right now, I mean, we are in active negotiations. Also it's reflective of beating the level of turns that was requested.
So, I just prefer not to, if you don't mind.
Brian Zarahn - Barclays Capital
Can you now provide the growth CapEx for PAA and PNG in the second quarter?
Greg Armstrong
PAA was right at $78 million and I want to say, PNG was roughly a quarter of that. I don't have that exact number in front of me.
Dean Liollio
We are working at it. If we don't get it before we get off the call, we will give you a buzz.
Brian Zarahn - Barclays Capital
Just finally, Greg, can you elaborate a bit on your comments about increased regulatory oversight?
Greg Armstrong
Boy, can I ever? Yes, I think there's no question that any time there's an event that the way we are seeing the goal, everything is going to be put under a microscope and I think what we are hearing and seeing from both, in the headlines and in the back channel communications is that Washington DC is going to cut the unemployment a little bit by hiring a lot of people to make sure they oversee operations in the field, I think it is going to carry over from Gulf of Mexico into the onshore.
There has also then unfortunately a spade of activities on shore with some pipeline releases and that kind of stuff, and so my comment was really directionally just simply to give a hands up, that I think it is probably out there and coming. I think it from a standpoint we had and it affects our profitability et cetera, inevitably those costs get passed on to the consumers, but the transition generally is painful and the headline issues that happened during the debate that generally goes on between the left and the right times trying to take claims who has taken the higher ground is always comical if not painful.
Dean Liollio
Then Brian on the PNG's capital, it was roughly about $30 million.
Operator
Our next question comes from the line of Stephen Maresca from Morgan Stanley.
Stephen Maresca - Morgan Stanley
Dean, thanks a lot for the detail on the on the storage side, and so my first question is, you talked about the hiring and the commercial optimization group, what does the PNG model look like going forward in terms of how you view the business, in the next two to three years, percent optimization percent you feel will be flat out contracted storage.
Dean Liollio
Yes, Stephen. From a percentage basis, I think before these recent activities we probably had a 12% or our total revenues coming from hub services, we clearly lowered that in our guidance in the last half of the year, but where I see customers going at least correctly with slightly lower terms of service, our group will be able to take the additional operational capabilities that that creates it's Pine Prairie, and really increase that over time.
So if you can not think about it from that term maybe little bit lower on the firm storage rates perhaps and with the level of service the customers are wanting a little bit higher overtime in hub services as far as a percent to revenue. Given that, we are still on the path and in the pricing we saw as far as it's still very comfortable with contracting our long-term storage contracts in the three to five year tenures Pine Prairie, and saw healthy demand for it.
Greg Armstrong
Steven, just to clarify. I think, we are still expecting to be in the 90%, it's not all the way to 100% lease category.
I think what Dean is referring to is, if whereas four, five months ago people were willing to pay a higher price for higher term service, so they paid a premium price and they got the full nine turns that our facility could deliver. We are seeing where people are saying, look the hub services market is not currently active, thereby trying to cut cost, so they say I need your storage.
I will pay you less for but I will take less turns. What that means is, we still lock that in but we will have with the optimization group on board we have the ability to participate when those market opportunities do arise.
I think from a distribution coverage et cetera, we will still look to say anything that's above what we will consider base level activities that will be just like we treated PAA, it's kind of free equity but it's not for this distribution. So you are still going to see a fairly conservative approaches as we bring these Cavern on maintaining solid distribution coverage against what we know we can deliver and yet at the optimization team that we are selling fewer term services has got more asset to work with that's effectively 100% committed except for the capacity or the excess deliverability to receive capacity is available for those guys to work with the optimization.
Stephen Maresca - Morgan Stanley
Greg, looking at PAA, the coverages are a little light this quarter and your look at guidance for next quarter a little light as well. Do you feel more comfortable going forward operating little above one-time distribution coverage or is it something you think is just temporary market fluctuation?
Greg Armstrong
I think we are very close the base level of operations. There's not been even on PAA there's much upside opportunity out there.
So, yes I think we said we were comfortable in the 103 to 105 coverage range when we were the bottom of that, because it's real solid. I mean, we're up over 80% fee based, I think this quarter, and so that's why when you look at the coverages, and we do have a little bit of saddle effect, our LPG activity have a fourth quarter, first quarter benefit in there, and there is other parts of our business that also have a little bit of flavor there.
So, what you're going to see is, if you look at the first six months versus the just the quarter, you're going see coverage I think it's around 106 on the six-month basis. So if you go back, we actually forecast that in our numbers, I think we foreshadowed that in the year end conference call which was held in February.
So, none of that's a news to us in the sense that we expected it. I think when you look at the year, and you extrapolate out kind of the midpoint or upper midpoint of the guidance you are in that 103 to 105 in a year, where we are basically say and we are in a dead economy and we are not getting a lot of volatility to give John VonBerg a chance and his group a chance to make a lot on the increment.
So, yes, we are comfortable in that range. As we move up, as we start to see a lot of that free equity come in, your coverages might go up, but wouldn't necessarily change our distribution rate.
I think our distribution rate is where you'll find some incremental capital expenditures and acquisition.
Stephen Maresca - Morgan Stanley
Okay, and then final question, if I may. You talked about the increased regulation because you had the EEP oil spill.
I think a lot of this, its hard to see how well pipelines are maintained and I think some of us take it for granted. What is it that you guys do to make sure that things are safe and maintained well and what do you think, specifically can be done from a regulation standpoint that it is going to increase cost for you guys to make sure stuff like this doesn't happen?
Greg Armstrong
Well, what do we do? We worry a lot because there are certain things.
If a farmer goes out there and pulls a tractor and he runs his plough deeper than he should and he pulled a pipeline up, there is not anything in the world we can do to do that and we had here, recently, tremendous rains and it washed away a bank, it eroded and we had a pipeline, had a little bit of a leak and so we were able to get it cleaned up. What you do is, we do a lot of scenario planning.
We do a lot of drills. We spend, I don't know what the number is, Mark Gorman is in and he will be, but its millions upon millions of dollars as we acquire third party pipelines.
A lot of what we have done is, Steven, we have acquired and consolidated other companies and in many cases, the quality of their assets relative to the way we want to operate them, are just not up the stuff and so we build into our acquisition program the cost to bring those pipelines up. There has been, recently, just back to the government regulatory, there has been the pipeline integrity rules and those covered a limited portion of the pipelines in the U.S.
Those that were in high consequence areas and they had highly populated or close to water and then they also covered a size limitation on diameter of the pipe. We have worked through all of that program, but many years ago, PAA started to basically translate the next generation, how do we take those and that type of scrutiny and intensity onto all of our pipes and we have been working through that program.
In some cases, we have probably taken out 2000, 3000 miles of pipes, smaller diameter stuff, that has meaningful exposure to the environment but very little economic benefit, when we put it in perspective. So we built more pipe in West Texas and around there we've taken at least 2000 miles out alone.
Today you would love to have that as it was quality pipe, what we'd rather do, we just simply go out to build new pipe because at the end of day, we can negotiate with producers and everything, on margins, in a perfect operating environment, but it didn't work that way with old pipes. So we have had to build that into our margins and our returns.
So, quiet candidly, I think the industry has done a very good job, its unfortunate when these events occur, but for anybody to assume that EEP didn't do a thing they could to keep that lid there, I think that's just wrong. I think sometimes some stuff happen, and unfortunately when you've got thousands of miles of pipeline out there, unfortunately when you a spill in the gulf, a two barrel spill is going to get a camera put about two inches off, its got a little like, Lake Ontario.
Operator
Our next question comes from the line of Yves Siegel from Credit Suisse.
Yves Siegel - Credit Suisse
Just a couple If I could, one, just thinking about the open season for natural gas storage, I am just curious, and may be already answered or may be I have to follow up, but how much ability do the customers have in terms of, how much flexibility is built into what they are bidding on, i.e. do you go out and say, hey guys we have the storage available for you and we expect three to five years of tenure put in to bid or the customer is able to come in and say, this is what we would like.
This is how we would like to use. This is the number of churns and we wanted for just two years.
Could you describe how much specificity there is when you have an open season?
Dean Liollio
Sure, Yves. I mean we put some general guidelines out there as far as tenure not on turns, but on tenure and customers bid, sometimes they will bid outside those lines and it's a negotiating process from there.
Generally that works out fairly flexible once we get in to it, but as far as the awarding a particular bid we stick to some pretty close guidelines.
Greg Armstrong
The open Yves is non-binding. So, there are not stuck with strict parameters that if they tender they are in.
So, they do take some latitude, but I think for example what we saw in this year versus last year, I think last year we put 2 Bcf up for in an open season. We got between 25 Bcf or 30 Bcf of demand.
This year we put 2 Bcf up we got about 25. So, that kind of drives things.
Dean has commented about good volume metric demand. What we have seen is that the request for the high turn service, which is again a premium price is down this year because I think people are trying to have an major storage and [one- year] storage, but we just don't have the lower end of the service.
So, they're right in the coach classes as opposed to first class.
Yves Siegel - Credit Suisse
I can appreciate coach. Just in terms of diversity of customers, are you seeing the same sort of cast of characters or has that changed any?
Dean Liollio
Actually we were presently surprised we've commented on two sides of that, of the 25 Bs that Greg just mentioned that we have got 75% of the biz were from brand new customers that are in Pine Prairie right now. So that was very encouraging to us.
I would say much more infrastructure type customers and even more so if we go out to 2013 the bids that we received at the levels of interest I should stay in space, this far out there was much more heavily weighted to I would say power generators and utility types.
Yves Siegel - Credit Suisse
So I would redial as a net positive development. The last questions for Greg, you mentioned Pier 400, could you elaborate on your comments and also maybe put into the context of more regulation does that make it more daunting to try to get that project to the finish line?
Greg Armstrong
So I think what we are seeing here is once we kind of got through the shock and awe if you will of the 2008-2009 period where everybody was kind of paralyzed about what the future held for the economy and for energy demand etcetera, things just stabled out. They probably haven't leveled out at the most optimal level in terms of outlook for demand right now, but the same dynamics still exist today as it existed before and that is ultimately, you are going to have to bring in more crude oil by ship into Southern California and you are going to need to do that in an improving and environmentally friendly way and this would be, and I think as designed its probably the most environmentally friendly port certainly in the U.S.
and generally speaking, if it's U.S. in California, that might even extend to the world, if we were not bragging.
So I think we've put all those bells and whistles on there, just trying to make sure that the economics work, but the interesting thing is throughout the entire shock and awe period of '08-'09, we still had continued interest from the customers who I think didn't mind. They waited a little bit longer while they've shortened things out and we are also seeing the local regulatory bodies and agencies who are thirsting for jobs to see us come and so we are closer today than I think we've ever been.
That said, I think it will still be the fourth quarter before we would get back to you, but I think we are looking to create 500 plus jobs out there. That's pretty significant right now.
Operator
Thank you. Our next question comes from the line of Michael Blum from Wells Fargo.
Michael Blum - Wells Fargo
Thank you. Can you just clarify one point?
This question is about PNG, is your view that the weakness you are seeing in the overall market, is that a one season phenomenon, or do you think that there is been a structural shift in the market, and this is a multiyear trend?
Dean Liollio
Michael, this is Dean, I mean I can't comment right now on what's causing it, its just extreme warm weather, and what we are seeing and that is what is driving the front end, cash to be higher versus the winter supply and then just confidence that there is a lot of supply out there, this winter. All I can tell you is, I can't predict the market but it will change.
It's what we are seeing right now.
Greg Armstrong
Michael, I am just taking Dean's step further, we have had 30% warmer winter, and we have had record production, and unless fundamental demand, unless the economy is doing stronger and you take away the seasonal weather driven demand, if we had all of that excess production going into the storage right now, you will be jamming it and the front end price, summer price would probably be under tremendous pressure, because we started a year off with storage levels well above norms and frankly well above, where it was last year, and even today, we have had I think 13 now out of 14 weeks, this year where injections were less than last year, and yet we still are very close to storage levels that we had last year, and well above 400 Bcf - 500 Bcf, above five year highs. So that is why we think it is temporary.
When you ask is it a one season phenomenon, now you have to say, for how long is drilling moratorium in the gulf of Mexico and then keep for a couple of years and you will see that production fall off, and then we will go back to a different kind of balanced market. So, if they have got cold tomorrow, I can tell you this, you would start seeing injections coming pretty fast because there no other place to put it.
I think in the last weeks we've actually had withdrawals and the producing part of the US, for storage in the middle of the summer when we are typically building inventory and I'd certainly say that's the case with our facilities. Then last week, we had withdrawals both, in the producing in the West.
So, I guess, [it's harder than a pistol] when you are seeing it in the market. What Dean was also talking about is, because production levels are so high and inventory levels notwithstanding the lack of injection are still high through the end of the season, nobody is worried about running out of gas in the winter time, so you don't have pressure upward pressure on the spreads.
Again, you take weather out of the picture, you'd be jamming gas into the ground, you would be pushing the price down and you would probably have the winter price staying about the same. So, your spread will widen out.
Last year, we went from probably $1 spread as it got close to the end of the summer and people realized that we are going to build storage up, I think the spread moved up over $2.
Dean Liollio
Michael, just to give a little data points in exactly what Greg was saying. Last year at this time, and these are fresh numbers of this mornings storage report.
We were little over three Tcf last year. Right now we are at 2.95 Ts full.
The five-year average is little over 2.7, so even with this super warm weather and demand up because of that, we are still seeing the storage fill and I think Greg is exactly right given here in couple of months we will see it coming at some pretty strong rate.
Operator
Next, we go the line of John Edward from Morgan Keegan.
John Edwards - Morgan Keegan
I am just curious if you can talk about this. How many Bcfs of storage are up for sale and then what is the mix in terms of low turn versus high turn service?
I don't know if you can talk about any of that or not, but I'm curious about that.
Greg Armstrong
Well, I can tell you we don't have any available in most of the…
John Edwards - Morgan Keegan
I mean in the acquisition market is what I am talking about.
Dean Liollio
Probably can't. Those that we signed CAs they'd grapple and say anything about and those we haven't signed CAs they'd only be guessing.
So, I think generally it was true statement that we made before. We think most of the facilities that are coming up for sale have been recently built and they were built for the higher turn storage service.
90% of storage is probably held by utilities and is not up for sale, so it's the storage on the margin that's available. So, it's primarily the higher performance service, realizing that higher performance has a range within that.
If you look at our Bluewater facility, which is kind of you're your conventional depleted reservoir, that's a one to two, maybe a three-turn service. So if you are in the Cavern storage probably the minimum you're looking for is about four and it can go up as high as nine.
John Edwards - Morgan Keegan
Maybe I can ask, in terms of the value of stores that's on the acquisition market dollar-wise, any range you give us?
Greg Armstrong
There is approximately $3 billion in terms of projects that we see that are out there. Then again, I can bake that back to pre-CAs and there has been one transaction of recent that's been about $0.5 billion.
So if that was included it would reduce that to about $2.5 billion.
John Edwards - Morgan Keegan
The other thing I am curious about is, we've seen announced recently some private equity projects. Are those in the same camp kind of high turn service that you are seeing any thoughts you can?
Dean Liollio
Most of them are higher turn service.
John Edwards - Morgan Keegan
I didn't catch the debt that was on PNG at the end of second quarter. I think you said $205 million, or what was that?
I missed the number you had on the slide. What was that again?
Greg Armstrong
You got it correct. It was $205 million.
Operator
(Operator Instructions). Now, we will go to the line of Michael Cerasoli from Goldman Sachs.
Michael Cerasoli - Goldman Sachs
Just a quick question on crude oil pipeline flows. Given the incident in the Gulf and more recently Enbridge has shutdown of Lines 6B, have there been any opportunities over the past few week, months and do you expect any opportunities down the road as a result?
Dean Liollio
Things are immediately rerouting to try and get crude oil from where its at where it needs to be, I don't think there's been any significant market disruptions, partly, Michael, because storage was so very high to begin with. So, there's a lot of stocks to pull down from before somebody is going to go start paying the premium to ship it around a problem area.
Especially, if think the area is going to be resolved fairly quickly.
Michael Cerasoli - Goldman Sachs
Then from a higher level, are you guys seeing anything that suggest the economy is deteriorating further? Is it stabilizing, improving?
Some color there would be great.
Greg Armstrong
We don't necessarily see anything that tell us. I certainly think it's probably fair to say from what we can see it's stabilizing is probably the right word.
It's not right not stabilized onto level we all wanted to.
Operator
Our next question comes from the line of Adam Rothenberg from [Zimmer Lucas].
Adam Rothenberg - Zimmer Lucas
I am curious as to better understand the acquisition market for natural gas storage. Did you guys look at the Bobcat acquisition, and sort of did that process go for you guys?
Dean Liollio
Adam, we really can't comment on other peoples' processes. Just couldn't.
I can give you a long-winded answer, but it would still be same conclusion.
Adam Rothenberg - Zimmer Lucas
What was the effect that Keystone had on you guys for the second quarter, since this is going for line.
Dean Liollio
I am looking at our gas, say it had really not a big impact at all. It just had effect of the credit close that we are involved with.
Adam Rothenberg - Zimmer Lucas
Also, it looks like it points during the second quarter, the contango currents got a little bit wider and some of the differential, some of the geographic differences did well, were you guys able to lock any of that maybe in the third and fourth quarter?
Dean Liollio
We certainly built part of that, and some of that's in our numbers. I would say this, Adam, we unfortunately had to freight that out to stay with our tanks empty, until it gets to its peak and then lock it in, but we tend to basically phase and to the opportunities when there are.
So we started seeing pricing points well allocated to get X contango will commit, so much percentage of our tankages that we have available and then leg into it recently though recently though we've had 90% of our tankage in cushion pretty much on the long-term leases with third-party, so the volume exactly varies in cushion not as big as amount as you imagine.
Adam Rothenberg - Zimmer Lucas
Okay, and so that why you guys realize that sort of higher quality during the quarter?
Operator
Next we will go to the line of [Jeff Dirac].
Jeff Dirac
I guess building on Michael Blum's question, how does the modern world productivity say around ancillary, where you operate in fact the summer-winter spreads and presumably produce you can drill well in the summer. So, all the gas forward and then produce it in the winter time and replicate the function of production areas storage.
Do you think that phenomenon has an impact on rates going forward? How do you balance the value of storage with that spread under pressure?
Greg Armstrong
Yes. As a former E&P producer I will answer and I'll let Dean correct me if I miss a lot.
I mean, part of the issue there is the profile of the wells [Jeff] in updating ourselves, but in the early 80s when we had the ownership in the [Yucatan] and that kind of stuff, we were the primary source of storage. The pipeline companies had us under take-or-pay contract they would call up and say you can only produce gas 90 days a year in and we'll tell you which 90 days it is.
So, we had production there, but these are carbonate reservoir that had tremendous porosity and permeability and so it was just a matter of pressure and as we just open it up and compression. These wells, when you turn them on, they will have a 70%, 80% decline profile in the first several months.
And once you turn them on, because you have to see these great large fracturing technique and you put some tremendous volumes of water in there to create the fractures and fissure then flow it out. Once they turn it on they really can't turn it off.
So, it's conceivable that on the margin you can do that, but if you are seeing seen all these frac jobs, I mean there is a reason why pumping prices at Alberta I think is going to rip, there is limited number of these frac tanks and pump trucks to be able to do that. So you are not going to be able to solve the problem of peak to valley storage demand with bringing these wells on in stages.
So I do believe that can have an influence simply, because people start drilling and what we've seen already is, is that we didn't have the hot weather, we would have very low prices, which could have no price swaps people quit drilling. So, right now we have the phenomena of real good prices in the market.
There is probably over supplied fundamentally, but weather is sucking up all the excess.
Operator
At this time we have no further questions. Please continue.
Greg Armstrong
First, we'll just like to thank everybody for the continued support and participating in today's call, and we do look forward to updating you in November.
Operator
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference.
You may now disconnect.