Aug 6, 2013
Executives
Roy I. Lamoreaux – Director-Investor Relations Greg L.
Armstrong – Chairman and Chief Executive Officer Harry N. Pefanis – President and Chief Operating Officer Dean Liollio – President-Natural Gas Storage Business Al Swanson – Executive Vice President and Chief Financial Officer
Analysts
Steve C. Sherowski – Goldman Sachs & Co.
Brian Joshua Zarahn – Barclays Capital, Inc. Michael Blum – Wells Fargo Securities Cory J.
Garcia – Raymond James & Associates, Inc. Mark L.
Reichman – Simmons & Co. International Bradley Olsen – Tudor, Pickering, Holt & Co.
Ethan Bellamy – Robert W. Baird & Co.
Equity Capital Markets Shneur Z. Gershuni – UBS Securities LLC John D.
Edwards – Credit Suisse Securities, LLC James M. Jampel – HITE Hedge Asset Management LLC
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the PAA and PNG Second Quarter Results Conference Call. At this time all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session with instructions being given at that time (Operator instructions) And as a reminder, today’s conference is being recorded. I would now like to turn the conference over to our host, Director of Investor Relations Roy Lamoreaux.
Please go ahead.
Roy I. Lamoreaux
Thanks, Paul. Good morning.
We welcome you to Plains All American Pipeline and PAA Natural Gas Storage Second Quarter Results Conference Call. The slide presentation for today’s call is available under the conference call tab of the Investor Relations section of our website at paalp.com and pnglp.com.
I would mention that throughout the call we would refer to the company’s by their New York Stock Exchange ticker symbols of PAA and PNG respectively. As a reminder, Plains All American owns a 2% general partner interest in all of the incentive distribution rights and approximately 61% of the limited partner interest in PNG, which accordingly is consolidated into PAA’s results.
In addition to reviewing recent results, we will provide forward-looking comments on the partnerships’ outlook for the future. In order to avail ourselves with the Safe Harbor concepts that encourage companies to provide this type of information, we direct you to risks and warnings set forth in the partnerships’ most recent and future filings with the Securities and Exchange Commission.
Today’s presentation will include references to certain non-GAAP financial measures such as EBIT and EBITDA. The non-GAAP reconciliations sections of our websites reconcile certain non-GAAP financial measures to the most directly comparable GAAP financial measures and provide a table of selected items that impact comparability of the partnerships’ reported financial information.
References to adjusted financial metrics exclude the effect of these selected items. Also for PAA, all references to net income are references to net income attributable to Plains.
Today’s call will be chaired by Greg L. Armstrong, Chairman and CEO of PAA and PNG.
Also participating in the call are Harry Pefanis, President and COO of PAA; Dean Liollio, President of PNG; and Al Swanson, Executive Vice President and Chief Financial Officer of PAA and PNG. In addition to these gentlemen and myself, we have several other members of our management team present and available for the question-and-answer session.
With that, I’ll turn the call over to Greg.
Greg L. Armstrong
Thanks, Roy. Good morning and welcome to everyone.
Yesterday after market closed, PAA reported second quarter 2013 results. Second quarter adjusted EBITDA totaled $478 million, which exceeded the midpoint of our guidance range by approximately 10% or $43 million.
It is important to note that these results included an approximate $25 million adverse impact to our fee-based results from unforeseen operational issues in Canada that occurred during the second quarter of 2013. Despite the impact of these operational issues on our Transportation segment, our second quarter performance overall was essentially right on top of the performance expectations we provided on May 29, which was immediately prior to our Analyst Day.
Compared to last year’s second quarter, adjusted EBITDA, adjusted net income and adjusted net income per diluted unit, decreased by 8%, 16% and 32% respectively, primarily as a result of more favorable market condition we experienced in the second quarter of 2012. The quarter-over-quarter decrease in adjusted EBITDA is composed of a 7% increase in PAA’s fee-based businesses and a 30% decrease in Supply and Logistics segment.
Absent the operational issues in the second quarter of 2013, adjusted EBITDA for our fee-based businesses would have increased by approximately 15%. As expected, our Supply and Logistics results decreased primarily due to narrow crude oil differentials.
A summary of our second quarter 2013 results is on Slide 3.
As reflected on Slide 4, PAA has increased its distribution in each of the last 16 quarters and in 35 out of the last 37 quarters. Yesterday evening, we also furnished financial and operating guidance for the third quarter and full-year of 2013.
The midpoint of our 2013 full-year adjusted EBITDA guidance of $2.19 billion reflects $30 million increase over the full-year guidance we issued last quarter, primarily as a result of our second quarter over performance. I think it’s worth pointing out that our full-year guidance was not adversely impacted by the recent collapse in crude oil basis differentials and the major shift in the crude oil market structure from Contango to Backwardation, as the potential impact of many of those changes were already incorporated into our forward guidance.
Before I turn the call over to Harry, let me take a few minutes to address the significant changes in market divisions that have taken place over the last several months, which I believe will help set the stage for Al’s and Harry’s comments on our future guidance. Slide 5 contains excerpts from PAA’s last three conference calls, which highlight that we have been anticipating that the debottlenecking and the infrastructure expansions at PAA and many other crude oil midstream entities have been implementing would be effective at reducing the wide basis differentials and shifting the market from Contango to Backwardation.
As these comments indicate, we have been incorporating this outlook into our guidance as well as our longer term planning models for quite sometime. Essentially forecasting that performance from our Supply and Logistics segments were returned to base line levels.
For reference on Slide 6, we have included three graphs, showing basis differentials over the last 18 months for WTI and LLS, WTI and Brent, as well as the relationship with both WTI Midland and West Texas Sour to WTI Cushing pricing. As included on Slide 6 on the lower right-hand corner, which we also included is a graph showing the market structure for the 12- month and the third-month for the WTI futures contracts over the last nine months.
We have noted the date of each of our last three conference calls to highlight the changes that have taken place over that last nine-month period. As a result of PAA’s disciplined approach to forecast the results for our Supply and Logistics segment, the recent shift in basis differentials in market structure did not have a material impact on our forward guidance or on our long-term planning models, which are prepared using baseline performance.
It’s not our cautious approach to forecasting baseline type performance, we do believe that the market will remain volatile and while the majority of the focus over the last two years has been on geographic or bottleneck related issues, looking forward, we believe quality rated differentials will become more prevalent. We believe those commissions will result in meaningful upside opportunities for PAA from time-to-time.
All that said, it’s very difficult to predict the timing of any such future events within the accuracy. However, because PAA is active in substantially all aspects of the Midstream crude oil value chain and has a major presence in substantially all the primary producing areas, as well as demand driven areas, we believe PAA is well positioned to deliver solid baseline performance in typical markets and above baseline performance in attractive markets.
During the remainder of today’s call, we will discuss the specifics of PAA’s segment performance relative to guidance, our expansion capital program, our financial position and the major drivers and assumptions supporting PAA’s financial and operating guidance. We will also address some more information for PNG.
But at the end of the call, I’ll provide a brief recap, as well as some comments regarding our outlook for the future. With that, I’ll turn the call over to Harry.
Harry N. Pefanis
Thanks, Greg. During my section of the call, I’ll review our second quarter operating results compared to the midpoint of our guidance, the operational assumptions used to generate our third quarter guidance, as well as provide an update on our capital program and acquisition activity.
As shown on Slide 7, transportation adjusted segment profit was $167 million, $18 million below the midpoint of our guidance, volumes of 3.6 million barrels per day or approximately 80,000 barrels per day below the midpoint of our guidance. Adjusted segment profit per barrel is $0.51 or $0.04 below our midpoint guidance.
The quarter was adversely impacted by approximately $25 million from two events. But first, as a precautionary measure, we shutdown certain pipeline segments in Western Canada due to the high flow rates of water crossings, which caused revenue to be lower than forecasted.
I’ll note that we are replacing some of these water crossings, so these pipeline segments will continue to be out of service proportion for the balance of 2013. The impact of the second half of the year is that made it to be approximately $15 million and which has been taken into account in our guidance.
Secondly, our operating costs were higher than anticipated due to response from remediation efforts related to pipeline releases on our [Rainbow II] pipeline in Northern Alberta. Adjusted segment profit for the facility segment was $153 million, $13 million above the midpoint of our guidance, volume of 121 million barrels of oil equivalent per month was in line with the midpoint of our guidance, and adjusted segment profit per barrel was $0.42 or $0.04 above the midpoint of our guidance.
Overall performance in this segment was primarily driven by processing gains at our Fort Saskatchewan facility and over performance at PNG. Adjusted segment profit for the Supply and Logistics segment was $154 million, $45 million above the midpoint of our guidance.
Volumes of approximately 1 million barrels per day were in line with the midpoint of our guidance and adjusted segment profit per barrel was $1.66 with $0.47 of barrels at the midpoint of our guidance. Over performance in this segment was primarily due to higher NGL margins and variable crude oil market conditions particularly among various crude oil great differentials in Canada.
Maintenance capital expenditures for the first half of 2013 were $82 million and we expect total 2013 maintenance capital expenditures to range between $175 million and $195 million. Now, let me now move on to Slide 8 and review the operational assumptions to generate our third quarter 2013 guidance [reported] yesterday.
For the transportation segment, we expect adjusted segment profit to be $204 million. Volumes to be 3.76 million barrels per day and adjusted segment profit to be $0.59 per barrel.
Our third quarter transportation guidance includes a benefit of capital projects coming into service, continued production growth in the Eagle Ford and Permian Basin areas and increase in the FERC index, which became effective July 1 of this year. Our guidance also reflects the fact we’ve old the New Mexico refined product system effective July 1 of this year.
For the facility segment, we expect adjusted segment profit to be $135 million, capacities to average $122 million barrels of oil equivalent per month, and adjusted segment profit to be $0.37 per barrel. When compared to second quarter, our third quarter forecast is lower due to the timing of integrity expenses and seasonally lower net revenues from P&G.
For the Supply and Logistics segment, we expect adjusted segment profit to be $90 million, volumes to be approximate $1 million barrels per day, and adjusted segment profit to be $0.99 per barrel. Although, we continue to expect robust supply growth in North America, as Greg mentioned, recent supply capacity additions have no crude oil price differentials.
Our assumption for the quarter is a deep differential will remain compressed relative to the last year or so. I’ll now move on to review our capital program, which is shown on Slide 9.
I note that primarily as a result of new projects and expansions of existing projects, we have increased our 2013 capital program by $200 million to $1.6 billion. Also, as a result of carryover activity, we expect to incur approximately $1.1 billion of capital attributable due to improved projects in 2014 and beyond.
Slide 10 provides an update on the expected in-service timing of some of our larger approved projects. I’ll provide a quick update on some of these larger projects now.
In the Eagle Ford, our joint venture pipeline from Gardendale to Corpus Christi is in service and we expect to complete the connection to our dock facility and the pipeline expansion to enterprises line in September.
We’re also advancing our recently announced Cactus Pipeline and are targeting to have that line in service in early 2015. In the Mid-Continent Phase I of our Mississippian Lime pipeline was placed into service on August 1, and the Phase II extension to Coldwater, Kansas is expected to on service in the fourth quarter of this year.
Additionally, our Western Oklahoma extension is on schedule to be in service by the end of the first quarter 2014. In Canada, we expect our Rainbow II drilling Pipeline to be in service next month.
The slide will move drilling from Edmonton to Nipisi to grow include oil production in the Peace River area. As discussed at our Analyst Meeting, we are also advancing several closed projected at our Fort Saskatchewan Facility, including the development of three additional propane caverns and the conversion of two of our larger existing caverns from propane servers to condensate servers.
And then lastly, we had positive non-binding responses to our Western Reach Open Season and are continuing to advance discussions with interested parties. With regard to our rail expansion, the timing, capacity of our rail projects are shown on Slide 7.
Weather and permitting caused delays relating to our in-service dates relating to both Yorktown and Tampa facilities. However, we expect both of these facilities to be in-service in October.
Expanding on some of Greg’s earlier comments, I’d note that differentials on certain grades of crude oil made rail economic a little more difficult. However, third party throughput commitments and the scale and scope of PAA’s asset base and the structure of our business model, provide us with a counterbalance for fluctuating rail volumes.
As volumes move up for rail, in many cases, we’ve seen uptick in volumes into certain of our pipeline systems. Before I move on, I would note that we are continuing to advance a multibillion dollar project portfolio.
Of course, not all these projects come to fruition, but the opportunities set is very large, and at this point, we expect our 2014 capital program to be in the $1.3 billion to $1.5 billion range. Lastly, we completed sale of our New Mexico Products Pipeline System effective July 1, and we are targeting the completion of the sale of our Rocky Mountain Products Pipeline System subject to FTC approval by the end of the third quarter.
And I also note that we did not have any acquisition during this quarter. And with that, I’ll turn the call over to Dean to discuss PNG’s operating and financial results.
Dean Liollio
Thanks, Harry. In my part of the call, I will review PNG’s second quarter 2013 operating and financial results, our financial position as of June 30, 2013 and our financing activities.
I will also provide an update on PNG’s capital program, discuss current market conditions and review our third quarter and full year 2013 guidance. Let me begin by discussing the results we released yesterday.
As shown on Slide 12, PNG reported second quarter adjusted EBITDA of $30.6 million exceeding the midpoint of our guidance range by $4.1 million or 15%. This marks the 12th consecutive quarter that PNG has delivered results in line with or above guidance.
Our results were underpinned by our fee-based firm storage contracts with over-performance driven by acceleration of margins associated with merchant storage revenues, previously expected later in the year, as well as higher than forecasted oil revenues associated with liquids removal activities at Bluewater. Compared to last year’s second quarter, adjusted EBITDA increased 3%, adjusted net income decreased 3% and adjusted net income per diluted unit decreased 4%.
With respect to distributions for the second quarter of 2013, we declared a quarterly distribution of $0.3575 or $1.43 per unit on an annualized basis. This was equal to last quarter’s distribution.
Financially, PNG’s midyear credit metrics are solid. As shown on slide 13, as of June 30, 2013, PNG had a long-term debt to capitalization ratio of 28%, adjusted EBITDA to interest coverage of 11.2 times, a long-term debt to adjusted EBITDA ratio of 3.9 times and $204 million of committed liquidity.
Additionally, in the second quarter of 2013, PNG sold 1.4 million units through the partnership’s continuous equity offering program, raising approximately $30 million of equity capital. This amount includes the General Partners’ proportionate capital contribution.
As mentioned on our previous conference calls, we believe this program is the most cost efficient and least disruptive way to raise equity funding for our ongoing capital investments and fine tune our liquidity, balance sheet and credit metrics. Operationally, we are on budget and on schedule with our 2013 cavern expansion activity, which are expected to total approximately 8 Bcf of incremental capacity, approximately one half of which was placed into service in April.
Before I discuss guidance, I want to first share some observations on market conditions for natural gas storage, the PNG’s performance to-date and our outlook for the balance of 2013 and perspective. Over the last few months, seasonal spreads, which are proxy for the intrinsic value of storage, had been pretty uninspiring as they range between $0.27 and $0.35 and set new 10-year lows for this time of year.
In addition, volatility levels, which have a meaningful impact on the value we are able to realize on a short-term basis from our hub service and merchant storage activity, have also been fairly anemic. Slide 14, illustrates these observations.
Fortunately, due to our highly contracted portfolio and the defensive posture we adopted sometime back as market conditions eroded, these weakened conditions have not had a material adverse impact on our results thus far in 2013 or on our outlook for the balance of the year. As shown on Slide 15, the midpoint of our full year adjusted EBITDA guidance, which we established at the beginning of the year remains at a $120 million and we are forecasting midpoint adjusted EBITDA of $26.5 million and $31.4 million for the third quarter and fourth quarter respectively.
Depending on the realization of certain of our merchant activities, there could be some shifting of results between these two quarters. We expect distributable cash flow of $107.9 million for the full year of 2013.
Consistent with our discussions of guidance on our February conference call due to the seasonality of our business, we project distribution coverage for the third quarter to dip below one-to-one on distributable cash flow of $23.6 million, while distribution coverage for the full-year 2013 is forecasted at right around one-to-one. For more detailed information on our 2013 guidance, please refer to the Form 8-K that we furnished yesterday evening.
As we have indicated in prior conference calls at our recent Analyst Day, we remain optimistic about the intermediate to long-term outlook for natural gas storage. However, looking out at the futures curve, the seasonal spread for the next few years reflected directionally similar picture to those we are experiencing in 2013.
While it is early that tempt to reliably predict market conditions for 2014 and associated impacts on our projected 2014 performance, should current market conditions persist that will likely have a negative impact on our 2014 outlook relative to our 2013 guidance. Consistent with past practice, we claim to provide preliminary 2014 guidance in conjunction with our third quarter conference call in November.
on balance, we are pleased with the performance that our assets and our teams are positioned to deliver for 2013 during challenging market condition and believe we are as well positioned if anyone in the industry to address the challenges and opportunities the future hosts for natural gas storage. With that, I’ll turn it over to Al.
Al Swanson
Thanks, Dean. During my portion of the call, I’ll review our financing activities, our capitalization and liquidity, as well as guidance for the third quarter and full-year of 2013.
Our financing activities this quarter were limited to our continuous equity offering program. PAA sold approximately 3.5 million units in the second quarter, raising approximately $200 million in equity capital.
This amount includes the General Partners proportionate capital contribution. We’re very pleased with this program as the cost is attractive, execution is much less disruptive on the trading of PAA’s units compared to the traditional overnight or one day market as operating and the scalability enables us to increase or decrease the activity levels based on a variety of factors including our expected needs as well as overall markets conditions.
As illustrated on the Slide 16, PAA ended the second quarter with strong capitalization and credit metrics that are favorable to our target. At June 30, 2013, PAA had a long-term debt capitalization ratio of 45%, our long-term debt to adjusted ratio of 2.9 times, and adjusted EBITDA at the interest coverage ratio of 6.4 times.
Our committed liquidity at the end of the quarter was approximately $2.6 billion. Slide 17 compares PAA’s scale and credit profile against PAA’s MLP peers that have a credit rating at or above PAA’s current rating level.
Slide 18 summarizes information regarding our short-term debt, hedged inventory, and linefill at quarter end. Moving on to PAA’s guidance, as summarized on slide 19, we’re forecasting midpoint adjusted EBITDA of $430 million and $2.19 billion for the third quarter and full-year of 2013 respectively.
As Greg, and Harry both mentioned, our guidance for the second half of the year assumes less robust market conditions than we experienced in 2012 and in the first half of 2013. This specifically impacts guidance furnished for our Supply and Logistics segment, where we have assumed baseline profitability for the remainder of the year.
Our second half 2013 guidance for the Transportation and Facilities segment has been reduced slightly, primarily as a result of a shift in timing of operating expenses, completion timing of certain capital projects and some lingering effects of the Canadian floods. For more detailed information on our 2013 guidance, please refer to the Form 8-K that we furnished yesterday.
As represented on Slide 20, based on the midpoint of our 2013 guidance for implied Bcf and distributions to be paid throughout the year, our distribution coverage is forecast to be approximately 135%. This equates to PAA generating and reinvesting approximately $400 million of cash flow in excess of distributions in 2013.
Given our strong capitalization at quarter-end, proceeds from the refined products, pipeline sales and our projection for retaining Bcf for the balance of the year, we have funded the equity capital needs associated with our $1.6 billion 2013 expansion capital program as well as a fair portion of our 2014 capital program. Given our visibility for 2014’s preliminary capital plan and the potential for the increase, we intend to continue the access – continuous equity offering program to prefund our equity needs as well as position for potential acquisition activity.
Accordingly, absent significant acquisition activity, we do not expect to execute an overnight or marketed equity offering during 2013 or 2014. With that, I’ll turn the call over to Greg.
Greg L. Armstrong
Thanks, Al. The first half of 2013 has been a very active and very productive period for PAA and we are pleased with our positioning for the remainder of the year and beyond.
As discussed in detail during our Analyst Meeting at the end of May, PAA’s significant asset presence in substantially of the major North American crude oil resource plays, positions the partnership to meaningfully benefit from continued increases in crude production. The partnerships proven business model, multibillion dollar organic project portfolio and solid capital structure, provides strong visibility for continued attractive multiyear distribution growth without relying on potential acquisitions.
That said, we believe all of these characteristics position PAA to capitalize on attractive acquisitions, especially if the industry or the capital markets weaken. Prior to opening the call for questions, I would note that late last month, our general partner filed an S-1 Registration Statement with the Securities and Exchange Commission with respect to a planned public offering of equity ownership in our general partner.
Due to the regulatory restrictions involved with this process, we will not be able to answer any questions related to this filing, but we’d note that all 400 pages, which are available on the SEC website. We thank you for participating in today’s call, for your investment in PAA and PNG.
We are excited about our prospects for the future and look forward to updating you on our activities on our next call in November. Paul, at this point in time, we are ready to open the call up for questions.
Operator
Thank you. (Operator Instructions) Our first question will come from the line of Steve Sherowski of Goldman Sachs.
Please go ahead.
Steve C. Sherowski – Goldman Sachs & Co.
Hi. Good morning.
Just trying to drill down a little bit on your preliminary 2014 CapEx forecast of $1.3 billion to $1.5 billion, is there any detail that you can provide by segment and of this spending, can you characterize how much of these projects are going to come online next year versus 2015 and beyond?
Greg L. Armstrong
Steve, I guess, I can direct you to some of the detail. First off 99% of the capital is dedicated to both the facilities and the transportation segment.
So it’s substantially all fee-based activity. Second, if you kind of look at the two slides, we changed one of our slides that we had this year.
If you look at the slide on the capital program to provide the detail for the 1.6 billion that we’re spending in 2013, but the pie chart on the right actually reflects the total, roughly 3.6 billion that is being spend on those activity. So we broke that down on this call, because we did have some insight into what’s for 2014.
So you can see, roughly, 900 million of that was prior projects, been prior to 2013, 1.60 in 2013 and then 1.1 is carryover into 2014. And so we did break it down by regions into the different areas, I’m sorry, what – so what?
Harry N. Pefanis
Yeah, the 1.1 in 2014 and future.
Greg L. Armstrong
In future, I should say yeah. But look at the potters of 2014, so when you look at that slide in connection with the other slide, we show the timeline for bringing those into service you can kind of get a fell, I think directionally for what you are looking for.
I would point out unique among our projects, again, there are smaller projects, but in somewhat integrated activity, but we’re able to bring certain of the cash flows on in sequence, so you’ll see multiple check marks on certain of the labs, because we’re able to bring certain of the revenue generate activities on, early while we are still working on other aspects of it.
Steve C. Sherowski – Goldman Sachs & Co.
Okay, Thanks.
Al Swanson
I think slide 10 give you an idea of, again, service dates to…
Steve C. Sherowski – Goldman Sachs & Co.
Okay, great. And that’s helpful.
And just a quick follow-up, your S&L guidance implies a little bit of seasonality during the second half of the year. I was just wondering is this a reflection of more of a return to baseline earnings for the business or is there anything else going on?
Greg L. Armstrong
The baseline and the seasonality, if we did not have the favorable market conditions and there has always been periods of time it happens, it just happens at different times of the year sometimes, you would still see in a typical baseline, S&L forecast a bit of a shallow. It will starts off the first quarter and the fourth quarter are always our strongest quarters in a baseline condition and then it obviously falls off a little bit in the second and the third quarter.
So part of the ramp up that you are seeing in the fourth quarter is not that number transformed to get you to an annualized number, it’s really to reflect seasonality especially in our NGL activity.
Steve C. Sherowski – Goldman Sachs & Co.
Got you, understood, that’s it for me. Thank you very much.
Greg L. Armstrong
Thank you, Steve.
Operator
Thank you. The next from Barclays, we’ll go to the line of Brian Zarahn.
Please go ahead.
Brian Joshua Zarahn – Barclays Capital, Inc.
Good morning.
Greg L. Armstrong
Good morning, Brian.
Brian Joshua Zarahn – Barclays Capital, Inc.
On the increased 2013 expansion CapEx, can you give a little color as to what projects drove the increase?
Greg L. Armstrong
What projects drove the increase? Yeah, we had a handful – there a lot of projects, there are handful projects, and West Texas had really drove most of the increase, and a couple of other expansion projects that probably little premature to give you the details on right now.
For example, I think we started off beginning of the year, the Mississippian Lime, we had one, and in Oklahoma, we had a project in there. We later on announced that we had an extension on that.
So that added to it. We added the Cactus project to it.
A portion of that will be spent this year. The profoundness of the spend in the next year, so it’s really now anyone project is just the cumulative effect of a lot of activity.
Brian Joshua Zarahn – Barclays Capital, Inc.
Okay. There’s more addition of projects, not cost escalation non-existing projects?
Al Swanson
No, I’d say, cost escalations are at this point in time manner and manageable. Most of the time, they’re within kind of the scope of what we had out there that we certainly have had some incremental cost associated with timing delays.
So for example, if you’re paying for crude out there and right away, you’re trying to stay ahead of everything, but sometimes, the crudes catch up with your right-away permitting. But in general, I would say on balance, I think we’ve got again a number of projects, $1.6 million, we probably get 100 projects.
The largest one of which I think is probably in the $170 million range. So but if you look at it on individual-by-individual, we’ve got some that are up and down.
Overall, they’ve kind of on a cost expectation level netted to probably up 3% or 4% overall. So it’s some creep, but not much.
Harry N. Pefanis
Hey, Brian, I will give you a little more detail. So just probably the largest single one is the Fort Sask facility that I mentioned in my portion of the call.
We also have an expansion of some of our gas processing assets in the Gulf Coast. So those two probably make a 50% or 60% of the growth, there’s a little bit of cost increases in there, primarily with some of the rail facilities.
And then I said early, a couple of the expansion projects in West Texas.
Brian Joshua Zarahn – Barclays Capital, Inc.
Yeah, that’s helpful. I guess turning to rail, can you give a little more color as to the impact of narrower price differentials, and maybe can you maybe frame how much of your, give a rough idea, how much capacity you have that’s protected by throughput commitments?
Harry N. Pefanis
Yeah, really the differentials impact the Supply and Logistics segment a lot more than the rail facilities, and it’s just narrowing of the differentials that both Greg and I mentioned, which makes it a little more challenging, but the rail facilities, they are actually performing at the levels that we had anticipated. And it’s a combination, I have to get back with exactly how much of it’s contracted, but a good portion of our existing capacity is contracted.
For example, the facility we’re bringing up in Tampa is substantially under contract, so, and those are fixed fees on the facility side. So again, where you’re seeing the swing is to the extent we’re actually participating by actually merchanting crude – our margin there are yet never reflected in the outlook for the Supply and Logistics guidance that we have given you.
Brian Joshua Zarahn – Barclays Capital, Inc.
And just final one from me also on rail, I know it’s probably a little early, but I anticipated impact from a cost perspective from the Quebec derailment on Quebec rail potentially higher maybe retrofitting tanks for safety or any, which is more just an unfortunate incident?
Al Swanson
I don’t think it’s going to impact any of our assets. It may impact the way – the derail infrastructure itself, but we can’t see it impacting our terminals or our offloading or unloading facilities.
Greg L. Armstrong
I think, the jury still out on all the issues on that one, it is an unfortunate accident, but I think the way the rail companies manage their assets maybe affected more so than their shippers.
Brian Joshua Zarahn – Barclays Capital, Inc.
In terms of your Bakersfield project, I don’t know much of this permanent yet, but that if you could just potentially have a delay on permanent?
Greg L. Armstrong
Yeah, that facility is already permitted.
Brian Joshua Zarahn – Barclays Capital, Inc.
Okay.
Greg L. Armstrong
We are just starting construction, it will be in service for first quarter of 2014. And so, hey and this is getting back just, it’s a measuring stick on the percentage contracted.
The USP acquisition which we completed last year about 75% of that capacity was contracted long-term.
Brian Joshua Zarahn – Barclays Capital, Inc.
And then how much was contracted?
Greg L. Armstrong
It was fully contracted.
Brian Joshua Zarahn – Barclays Capital, Inc.
Thank you.
Greg L. Armstrong
Thank you, Brian.
Operator
Then next from Wells Fargo, we’ll go to the line of Michael Blum. Please go ahead.
Michael Blum – Wells Fargo Securities
Hi, good morning.
Greg L. Armstrong
Hey, Michael.
Michael Blum – Wells Fargo Securities
A couple of questions for me. One, so your guidance obviously assumes locational spread are down and Supply and Logistics is more on the baseline level.
When do you expect the quality differentials you’ve been talking about recently at your Analyst Meeting? When do you expect those to start to materialize in that the significant way that you might start seeing again a pickup in outperformings in the Supply and Logistics segment?
Greg L. Armstrong
Well, part of the reason that we don’t forecast, because we don’t know when to tell you that’s going to happen. But I’d say within the time period, certainly within the next 12 to 18 months, and I think it will show up through a combination just as the volume builds and the refiner start to pushback when they are trying to balance their sources of supply relative to refining efficiency and alternative costs.
And I think, you really see it show up when there is any kind of operational upset if a refinery goes into turnaround and you start having to back in particular half of crude, as well as the volume. It can cause – it can exacerbate what has already been a very volatile capital environment.
So it’s just one more variable in the normal equation on an operational standpoint and then over, again, the next 12 to 18 months, if you just look at the forecast and I’m going back to our Analyst Day that we showed, we expect volumes or quality issues to start showing up on a regional basis where you’re just going to end up with your short volume of crude, but your longer particularly quality of crude. A part of the reason for us building Cactus pipeline is to help balance that market, but again, construction never exactly goes hand-in-hand with your expected timing with respect to trying to balance those markets.
So I’d say if you’re looking for a time window, it’s in that 12 to 18-month period.
Michael Blum – Wells Fargo Securities
Okay, great. And then my second question was just wanted to clarify your comments on rail versus pipe.
I guess, are you saying that with spreads coming in, and some of that volume moving off of rail onto pipe, from a PAA Enterprise perspective, you are agnostic that you’re capturing it one way or the other or are you just saying that because of commercial capabilities you have with your Supply and Logistics segment, you are able to base effect of the base load your own rail assets with volumes. So even though spreads are coming in, you are not as impacted as you would expect?
Greg L. Armstrong
Yeah, not being to (Inaudible) the answer to your question is yes. On the either, for example, as we start to see certain rail economic especially not only for PAA, but some of our competitors in the rail market as those volumes start to back off the rail, they’re going to go back, in some cases, on pipeline.
If you recall, there was a period of time probably 18 months ago, when all the pipelines out of the Bakken were full, there is a lot of excess capacity on those pipelines today and we happen to own interest in some of those pipelines. So we’re going to see some of those volumes shift back over to pipelines such as Butte and other ones.
Harry N. Pefanis
That we have in Canada, Co-Ed has done many
Greg L. Armstrong
Right. So you’re going to see some of that show backup on the pipeline side of it.
So I won’t say we are agnostic, but we are certainly well positioned if not hedged and then in addition, because we look at the total value chain of not only the actual cost to the third party, but also our variable cost, our S&L may have the ability to take up some of that excess capacity on our rail assets, loading and unloading, and rail cars, and terminals to be able to basically carved out of margin where somebody that’s only involved in one part of that value chain may not have that flexibility.
Michael Blum – Wells Fargo Securities
Okay, great. Thank you, Greg.
Operator
And next we’ll go to line of Cory Garcia of Raymond James. Please go ahead.
Cory J. Garcia – Raymond James & Associates, Inc.
Morning fellows, I appreciate all the color as usual. I was kind of digging through your back half guidance for the year and completely understand sort of the S&L segment income drop off given the base differential outlook, but I was noting the trucking volumes and just overall crude lease gathering is starting to flat line a bit, hoping you guys can provide maybe a little color into what’s underlying that trend.
Are you guys actually capacity constraint, is it the fact that pipeline gathering is actually starting to play catch-up in areas like in the Permian or is it just simply competitive trucking pressure in some of these areas?
Greg L. Armstrong
Trucking that you will see that’s included in the Transportation segment, is really with respect to our Canadian activities, it’s not reflective of the gathering business now. In the U.S., from the gathering business, we are definitely seeing more volume get on the pipes, less on the trucks.
We typically complement our asset base with use of third parties. So as those more temporary volumes are lowered, we back away from third parties’ providers.
In Canada, it’s really just a reflection of how much crude goes to rail versus staying on the pipe. but it’s mainly, it’s a small volume that’s impacted in it’s really third-party business.
But I think Cory, you’re correct delays are in or in fact in the U.S. for example, as we build out some of the additional pipes that we’re bringing online in the Eagle Ford et cetera, that’s the intent as that we get it off a truck and onto the pipeline.
And then as Harry mentioned, we tend to manage then our trucking fleet by having third-party vehicles that we’re able to then back out of our system as far as ours active. So it’s all about margin management, in some cases, the volumes that you see going down may have limited margin associated with them.
but overall, there is, we talked about this, I think probably about four or five quarters ago that as we bring on some of our assistants, we’ll be taking some of margin away from our Supply and Logistics and put it over into transportation. On a per barrel basis, the margins are actually a little bit slimmer on the transportation and they are on the gathering side.
But we also fully acknowledge that if we don’t do that, somebody else is going to build it. So it’s all about managing the entire business over an extended period of time and that was build into our long-term planning model.
Cory J. Garcia – Raymond James & Associates, Inc.
Okay.
Harry N. Pefanis
Our volumes are turning up slightly in the lease gathering business, third quarter is slightly over second quarter. Fourth quarter is about 20,000 barrels a day over the third quarter.
Greg L. Armstrong
So we’re still seeing the fundamental growth in each of these areas that we’re anticipating in terms of the drilling activity by producers.
Cory J. Garcia – Raymond James & Associates, Inc.
That makes perfect sense. Appreciate the color guys.
Greg L. Armstrong
Thanks, Cory.
Operator
Thank you. Then next we’ll go from Simmons and to the line of Mark Reichman.
Please go ahead.
Mark L. Reichman – Simmons & Co. International
Good morning. I just have two questions.
First referencing the Contango/ Backwardation slide on page 6 of the presentation. I was wondering if you could discuss your expectations regarding the relationship between crude oil inventories at Cushing and then the spread between the WTI crude oil features, I mean clearly you can see the markets become more heavily backwardated into the third quarter.
So what are your expectations for Cushing inventories to forward curve and how that factors into your margin expectations for the balance of the year?
Greg L. Armstrong
And Mark, I wanted to not try to be too evasive. But certainly, don’t want to turn our play book over all of our competitors.
I would say the results of our views are reflected into our supply and logistics outlook. But we clearly, we didn’t speak about it before we then pronounced Contango and it was clear that we were seeing as the pipes freed up the model that it goes to the Cushing, we fully expected to see a situation where those tanks would at least get bled down or you’ll have free access to the Gulf Coast and we did see that.
I would say that I think it would be wrong to assume that we are in permanent backwardation because there is a lot of activity going on in some projects, but are announced in the several projects that haven’t been announced that we are aware of, that will change the dynamics of that. So I think its going to be volatile, but for right now, I mean, clearly we’ve got excess capacity, right now additional capacity coming on.
I should say with the keystone activation, that it should at least takeaway a lot of the pressure that is forced at the end of the steel Contango that it was before. But I think you will end up seeing, we are talking about really peer market structure where you’ve got WTI on a forward curve.
Keep in mind there is a hundred different grades and varieties accrued that are really pushed through Cushing. And so you may end up where the market structure for WTI maybe in backwardation, but you actually may have certain grades accrued in Cushing that are in Contango.
So it’s a little more complex than it appears and quite candidly we like it that way.
Mark L. Reichman – Simmons & Co. International
And then second, could you just discuss in a little more detail your activities in Canada, just by providing an update on some of the projects including western region? And also would you expect Canada this year, PAA’s overall CapEx budget to grow.
And if so, what opportunities are you seeing beyond those that you discussed at the Analyst Conference?
Greg L. Armstrong
Well, I think beyond what we said at the Analyst Conference in the day, we can’t really provide more color, I would clearly, we’ve been very pleased with the level of capital projects that we’ve been able to develop through the integration of the acquisition of the BP assets with our existing activities up there. Harry has referenced to Fort Sask and the key asset base that we have there and a lot of the projects that we’ve added that are in the capital budgets, it’s certainly Wyoming not all of what we have out there, we’re still working on several projects.
As far as the percentage relationship, that ebbs and flows and to some extent, for whatever reason since we first got into Canada in 2001 that the relationship has been kind of the same over years, it may move a couple of percentage points. I would say right now though, we’re certainly expecting overall capital activity and the pickup in Canada is relative to historical levels.
But when you look at it on balance with what it’s picking up in the U.S. on our cap activity, I’d tell you it’s not a material change in the percentage composition at all.
Harry N. Pefanis
Mark L. Reichman – Simmons & Co. International
Okay, great. Thank you.
I appreciate that.
Operator
Then next we’ll go to Tudor, Pickering in the line of Brad Olsen. Your line is open.
Bradley Olsen – Tudor, Pickering, Holt & Co.
Good morning, guys.
Greg L. Armstrong
Good morning, Brad.
Bradley Olsen – Tudor, Pickering, Holt & Co.
You all did a very good job of forecasting the moderation in differentials, but the Backwardation we have seen combined with strength in LLS and ANS in relation to brand, it all seems kind of like a blast from 2007 or 2008. Do you think that our current market dynamics persist long-term and more specifically is saturation in the Gulf Coast LLS market potentially the catalyst that brings the domestic market back to earth and moves the overall market back in a Contango?
Greg L. Armstrong
Great question. I would probably say in terms of, again, kind of we used to have kind of a pressure cooker analogy around here if you could envision a boiling pot with a lid sitting on it, everyone once while you see a steam vent escape and everyone once while the cot might blow up, and trying to predict that is pretty challenging.
I think what we’ve tried to do instead of predicting what land is everything fell from our capital structure to our asset base in our positioning. So we are not going to share any predictions as much as what we think we can basically tell almost no matter what happens PAA will be in a position to capture some of those opportunities and in certain situations, I think we can capture more than our fair share.
Bradley Olsen – Tudor, Pickering, Holt & Co.
Great, and with pioneer taking about potentially having found 0.5 billion barrels of oil in the Wolfcamp alone, just probably a pretty easy one, but do you see your opportunity set around the Basin and Mesa assets as well as around the gathering assets as increasing with that?
Greg L. Armstrong
I wouldn’t trade our position out there with anybody.
Harry N. Pefanis
That Permian Basin is so active. it’s hard to keep ahead of the infrastructure out there.
I think we think we’ve been pretty proactive in the area, developing some of the infrastructure upfront, but we’re producing and doing a pretty good job of keeping the pipes full.
Bradley Olsen – Tudor, Pickering, Holt & Co.
Great, thanks. And as far as the persistent strength we’ve seen in the LLS market, you obviously exposed to that in a variety of ways storage, rail et cetera.
How does the strength in the LLS market impact your future development plans around St. James?
Does it make you potentially, incrementally more bullish on rail, even with the proposed pipeline projects into the area?
Harry N. Pefanis
I think rail is going to be a permanent part of the logistical pattern in the U.S. and what we really try to do for that is put ourselves in a position where we can – we have a network of rail assets where we can move rail to various locations, the areas we think we’re going to see movements through are Gulf Coast, East Coast and West Coast.
So we’ve developed our unloading facilities there. And we think kind of the Niobrara, the Bakken and the Canadian.
We’re going to be looking for outlets in addition to pipes, there’s not going to be enough pipe to handle all the volume in those areas. It’s starting like to sense to develop pipeline solutions for all that production.
So overall, we like the asset position we have in the rail segment. There’s going be some ups and downs, if we look at our individual facility.
but overall, we certainly expect to generate the types of return we forecast when we got into the rail infrastructure business.
Greg L. Armstrong
Two other issues, Brad I mentioned is, is one embedded in Harry’s answer is not only the volumetric issues about the Mobile Pipe to relieve all the pressure in the area is the quality issue and the ability to take the right quality crude to the right area and in some cases, just like we’ve seen before you’ve had certain crude oil moving one direction on the pipeline and other type of crude oil moving the other direction on the pipeline. You’re going to see the same thing happen with respect to rail.
And then finally, I’d just point out that again, I get back to PAA’s integrated system, we can provide the producers with more flexibility. They probably today have figured out they don’t want a 100% commitment to any one pipeline or any one avenue at a time, be it rail or pipeline.
What they really want to know is who can get me to the best markets wherever that market is, and that’s what I think PAA’s investment and rail combined with pipeline combined with terminals, combined with our ability to merchant on the Supply and Logistics and provide the blending services to actually help improve the quality of crude, not only for the producers, but the refiners is, I just think it’s unparalleled in the business right now.
Harry N. Pefanis
And I just had one other comment. We’ve tried to locate our facilities like on the market side, on the unloading side, where have access to multiple markets, not just one refiner and likewise on the supply side, we try to situate our loading facilities in areas where we can aggregate crude from number of different sources, so not particularly tied to one producer or one refiner that on the loading and unloading side, but tied to market fundamentals.
Bradley Olsen – Tudor, Pickering, Holt & Co.
Great. and just two questions that are more operational in nature.
as we think about cap line utilization in light of, on one hand strong LLS pricing, but on the other hand, increased utilization at the BP Whiting Refinery. how is cap line utilization moved around in the last quarter?
And then finally, is there a significant benefit to the facility segment from higher utilization as storage turns increase during the speed backwardation that we’ve seen.
Greg L. Armstrong
Let me take cap line first. cap line is a pipeline that is actually, it operates; I guess three different pipelines, because of the same pipeline.
so BP owns an interest in cap line. So anything it does to whiting is going to be on the BP space that doesn’t necessarily impact our lines.
Our line has actually been pretty steady through the year and forecasting the study through the remainder of 2013, so not really expecting BP’s activity or most of the other, the other interest owners’ activity at the refineries do impact our capacity on cap line. And then with respect to backwardation facilities, it depends on; it sort of varies by facility.
obviously, at Cushing, you’re seeing quite a bit of volume decline and a lot of that does translate into additional throughput business at our Terminal Cushing. but what I distinguish our facility from some of the other facilities at Cushing, it really worked at the time, it’s an operational facility to start with, that really wasn’t designed as a Contango storage facility.
So we like seeing the higher volume, we like seeing the different crudes coming in, it does add incremental activity or terminal.
Bradley Olsen – Tudor, Pickering, Holt & Co.
Great, thanks guys.
Greg L. Armstrong
Thank you.
Operator
Thank you. Then next from Baird, we’ll go to the line of Ethan Bellamy.
Please go ahead.
Ethan Bellamy – Robert W. Baird & Co. Equity Capital Markets
Good morning guys. Two questions, first on gas storage, what’s the – I’m probably going to ask this in every call until we see something.
But what’s the outlook for M&A?
Dean Liollio
It’s Ethane, its pretty flat right now. I think most of them have chosen to whether through this period near-term.
I don’t at least, right now don’t see it any activity and probably not picking up till we start to see a recovery.
Ethan Bellamy – Robert W. Baird & Co. Equity Capital Markets
Okay, thanks Dean. And with respect to the maintenance CapEx at P&G, there is basically none in the guidance or de minimis where should that number normalize, over say a 3 to 5 year period?
Dean Liollio
About 600,000 a year.
Ethan Bellamy – Robert W. Baird & Co. Equity Capital Markets
Okay. And then Greg big picture, it looks like Mexico might – had a chance to change their constitution which could turn around oil and gas development there.
Are there any direct or indirect opportunities for you in Mexico and what would you expect the impact of potentially increased crude supplies coming out of Mexico that due to the North American markets at all?
Greg L. Armstrong
The later part of price is to add one more variable of volatility to which is not unwelcome, it’s pretty early you can be to kind of predict what impact anything that might Mexico would have on either opportunities said, I will say that when we acquired Velocity, which is now our Gardendale Gathering System. We basically are well positioned, I think better positioned but we have to service volumes across the border, the Eagle Ford doesn’t stop at the international border, clearly, there’s a lot of activity going on the other side and we would be the best market to be able to handle any development over there.
So I’d say it’s potential upside if they do encourage active investment, because again, clearly, the Eagle Ford is one of the best plays out there that we’re aware of. So I think we’re well positioned to see some benefit just in that one isolated area.
As far as kind of a big picture question is what role we play in Mexico, it depends on what part of Mexico it is and really what happens, but safety for our people will be number one, and right now, it’s kind of scary down that part of the country. So I’ll just say, send it to us by pipeline, we’ll take care of it.
Ethan Bellamy – Robert W. Baird & Co. Equity Capital Markets
Just one idea for your next Analyst Day, [Cabo].
Greg L. Armstrong
There’s a long story there, but Harry kind of voted against that.
Ethan Bellamy – Robert W. Baird & Co. Equity Capital Markets
Thanks, guys.
Greg L. Armstrong
Thank you.
Operator
Thank you. Then we’ll move to UBS Securities in the line of Shneur Gershuni.
Please go ahead.
Shneur Z. Gershuni – UBS Securities LLC
Thank you. Good morning, guys.
Greg L. Armstrong
Good morning.
Shneur Z. Gershuni – UBS Securities LLC
Don’t want to beat a dead horse here, but I was just wondering if we can just return to the S&L guidance that you presented. You mentioned in the past that you’re expecting margins are contracting so forth and sort of a expected return to baseline levels.
I was wondering if you can sort of remind us what baseline levels are, and what the variability would be with respect to seasonality, is the number that you’re guiding for 3Q basically kind of at the bottom of a typical range and what would be the high-end, so I was just wondering if you can sort of give us a little bit of color around that?
Greg L. Armstrong
Al, you want a way in?
Al Swanson
What I would tell you is that what you’re seeing for third quarter is pretty representative of baseline environment for third quarter and the same for our fourth quarter and there is a pretty meaningful amount of seasonality. As Greg and Harry mentioned earlier between the summer quarters and the two winter quarters, what you’ve seen is just a slight up tick in what second half forecast versus what we forecast last time, but our numbers are effectively on a baseline forecast and what you’re looking at?
Greg L. Armstrong
Yeah. If you’re looking for a neighborhood of what an annualized – an annual number would be probably in the 500 to 525 maybe 550 of what we would call a baseline type S&L margin.
Over time, that number could actually creep up, as we expand our asset base and we have continued growth in the resource base that we service. I think it’s not necessary to stag that number, now there’s other variables in the equation like competition et cetera that we really can’t factor in.
But we’ve been running here recently in the $800 million of full-year range and again, we would have guided you back and said baseline is probable, if you look at the relative over-performance versus our beginning of the year guidance, in most cases, that’s going to put you in an adjusted number in that $500 million range. Again, as we expand the asset base, I think you see that number to creep up a little bit.
If you are trying to break in that 500 number down, I think we’re showing this year for third quarter certainly, yeah, effectively assuming the second and the third quarter kind of in the same neighborhood then the first and fourth quarter will make up the difference on that. So you’re effectively looking at – and again, these are very round numbers, call it neighborhood of $115 million quarter in the first and the fourth and $100 million a quarter in the second and third and again, intending to kind of have those numbers to be round.
Does that help?
Shneur Z. Gershuni – UBS Securities LLC
No, that definitely does, definitely appreciate that. Just one last quick follow-up, you sort of mentioned at the beginning of your prepared remarks about some challenges in the fee base results during the quarter.
I was wondering, if you can expand on that a little bit. If the impact completely just volume related are the volumes high margin volumes or is it sort of a temporary spike in OpEx.
Is just sort of wondering, if you can certainly expand on the impacts on results from a volume and a margin perspective?
Greg L. Armstrong
Yeah, and actually as I was reading those I realized I could have done a better job at trying to tally in. If you actually look at – they don’t pair directly with Harry’s comments.
The challenges in the quarter were really related to the operational issues of $25 million. A part of that was simply with the high water in the rivers and we’ve got basically river crossings that go underneath.
And the concern quite candidly was that as that high velocity water washes out, we may end up with pipe that’s exposed. And so you didn’t want a lot of volume going through that, if in fact at these record flood levels that was a possibility.
So we basically, shut down the pipes and in some cases, we actually evacuated the pipes. So we didn’t have product exposed and so that was a loss of revenue for the quarter.
Those floods happened, if you recall in Calgary late in the second quarter, we’ve given our guidance I think in May, end of May our updated guidance and then the floods happened after that. So a portion of that was the lost revenue.
In many cases, we’re actually going in and doing what we call had directional drills to actually lower the pipe underneath those rivers to make sure we don’t have the issue in the future, and to protect the environment quite candidally. That’s actually going to carryover into the second half of the year because we still have some of those pipes shutting up and Harry’s estimate was about $15 million impact on the second half of the year in terms of reduced revenue.
The other issue again, that I was referring to and Harry talked about in his in the second quarter was we had a release on one of our pipelines there was expenses associated with that and there was actually a third party hit the pipeline again and so the expenses there, those are accrued as of the second quarter should not associated with that event affect the rest of the year.
Shneur Z. Gershuni – UBS Securities LLC
Great. And one last question on PNG if I may, you’d great commentary just in terms how the present market has been and where is at and so forth, have you seen or do you expect to see any distressed assets coming onto the market, and if so, would you take a look at that or given the environment probably not?
Harry N. Pefanis
No, we would take a look at them and at our May Analyst Day, I mentioned it’s just going to come down to how patient folks want to be through this and I think you could have some one-off facilities that are either embedded in larger corps that you could see come out. We’ll just have to wait and see, but we’re definitely interested in NOL they come out and we will be taking a look at them.
Shneur Z. Gershuni – UBS Securities LLC
Great. Thank you very much guys.
Harry N. Pefanis
Thank you.
Operator
Thank you. Then next we’ll go to the line of John Edwards of Credit Suisse.
Please go ahead.
John D. Edwards – Credit Suisse Securities, LLC
Yeah, good morning, everybody.
Greg L. Armstrong
Hi, John.
John D. Edwards – Credit Suisse Securities, LLC
Just if I could follow on Michael’s question, just with respect to differentials from grade differentials. Are you expecting those to be more than what you’ve seen on basis or less and – or if you can give us a feel for magnitude on that?
Greg L. Armstrong
I think the challenge, well, first off, we’re clearly seeing some of these differentials kind of weigh in when you got Brent-TI going from 27 down to 3, and in one case, a couple of days, one could actually trade at a premium. So I don’t think we’ve seen the last of the volatility in those corporate relationships.
I think the other issues that we’ll have is that as we continue to produce more and more light product, and if you’d recall the handout from our Analyst Day showed kind of the range of the qualities of crude and condensate that we’re seeing. In many cases, some of the condensate is 50, 60, 70 degree.
And I think that is going to become a point where this is too much of it in the market and if we don’t have an alternative market whether it’s international or the ability to put it onto a vessel or onto rail and get it to the market, you’re going to see discount show up in that. So we’re expecting it to be a vibrant, dynamic, volatile whatever you want to call it.
Market is just trying to predict when it’s going to hit its saturation point on a regional basis is difficult. We also know that the refiners are aware of the same situation; they’re working hard behind the scenes to try and position themselves to be able to take advantage of that surplus amount of volume and see if they can replace the heavier barrel.
And then you’ve got some that are bases that I can’t do that, but I can blend to heavier barrels and light barrels. John, it’s just going to really be volatile here for a while.
we think and again, it probably started to really show up in the next 12 to 18-month period.
John D. Edwards – Credit Suisse Securities, LLC
Okay, that’s perfect.
Greg L. Armstrong
And if you add operational offsets to that, it could show up next month.
John D. Edwards – Credit Suisse Securities, LLC
Okay. so I guess the answer is, we’re just going to have to wait, I mean it’s just too hard, too volatile to tell.
I was just wondering, we’ve seen obviously WTI brand go from 24 to two in just six months. and so I was thinking with all this light crude coming on, are we going to see a more similar evolve for dynamic or that’s what I was trying to get to?
Greg L. Armstrong
John D. Edwards – Credit Suisse Securities, LLC
Yeah. No question, there.
Just somewhere if we are trying to look down the road, try to maybe figure out what margins to assume that kind of thing, that’s all?
Greg L. Armstrong
Yeah.
John D. Edwards – Credit Suisse Securities, LLC
But anyway, okay. So just one of the thing, I mean you did guide a little higher on your capital spend and then you gave us some preliminary for 2014.
So I’m just wondering in terms of your overall opportunities that you’re looking at, are you in the outer, you say a little bit beyond 2014, say 2015. Are you still seeing, more opportunities come your way or are you seeing it taper off a bit.
So if you could give us any insight you might have there?
Greg L. Armstrong
Well, when you say, no, right now, we certainly don’t have the same level of cap expenditures on our long-term model for 2015 as we have in 2014. But that’s true every year that we do our model, I mean our best visibilities in the near-term.
I would say we feel pretty good about the outlook for continuing to have demand for capital projects that we can play a role in and have some either competitive advantage, because our asset positioning are simply because of our knowledge and the ability to work with our relationship with producers. I think an important note here is that if we could spend in capital after 2014, other than John just the tail off of projects, the velocity of growth we would expect to see all of the things being held constant in our EBITDA and our Bcf is still very positive for a couple of years beyond that simply because, for example, we are not yet harvesting from the capital that we’ve already spent in 2013, you’ll start to see it in 2014.
And that’s why we kind of guided people to say we’ll focus in on the Transportation and Facilities segments, that’s where all the capital is being spent. These are very attractive double-digit, in many cases, mid-teens kind of returns and when you compare that against our cost of capital, the math really starts to sink.
So we feel very good about our distribution growth for many years just based on organic growth that we’ve already gotten the hopper. When you start asking me about 2015, 2016 or 2017, we are focused on it.
We’re certainly trying to develop it, but you would expect to see a fall-off maybe 30% or 40% of the capital expenditures based on what we can see today. If we get out into the future and we continue to see not only the known areas develop as the way we had forecasted and maybe we are forecasting volumes in the U.S.
and Canada to increase from 2012 levels about 3.4 million barrels a day. I promise you our capital program of $1.6 billion this year and $1.4 billion next year, doesn’t address that kind of volume growth.
And so the question really is are we going to be able to capture some of those opportunities, who our competitions are going to be. Quite candidly, we position our balance sheet and our guidance in, we call it sandbag in where we want to call it, but we basically position ourselves to under-promise and over-perform and we wouldn’t mind seeing softness in any of the industry or the capital markets because they kind of level the playing field.
Right now, this capital is very cheap for everybody.
John D. Edwards – Credit Suisse Securities, LLC
Yeah, I’m looking at it. I’m just thinking just a couple of years back, I mean, the trajectory of spend was maybe of $500 million to $700 million and we are obviously more than double that.
And so just, I’m just thinking is that I mean sort of a more or less a new baseline sort of $1.5 billion spend, is that the way to think about it?
Greg L. Armstrong
I don’t know if I’ll call it a baseline, but it’s certainly the neighborhood we’d expect to be in for the next couple of years.
John D. Edwards – Credit Suisse Securities, LLC
Okay, all right. Well, that’s hopeful, thank you.
Operator
Thank you. Then next from Clarkson, we’ll go to the line of Matthew Phillips.
Please go ahead.
Matthew Phillips – Clarkson Capital Markets
Good morning guys.
Greg L. Armstrong
Good morning.
Matthew Phillips – Clarkson Capital Markets
Greg L. Armstrong
I think it’s going to be more of the function of the production volumes exceeding what the other baseline of refinery runs are. So for example, we’re forecasting Eagle Ford map for production right now, I’ll call it in the 800,000 barrels per day to 900,000 barrels per day going up to 1.6 million barrels a day to 1.8 million barrels a day.
A large part of that maybe in the order of 30% to 40% that’s going to be very light product, and if you look at the markets that are available today to service that which would be not only the South Texas market, but certainly the ability to go to Houston, but you’ve also got a lot of other volumes coming down from Cushing with the Keystone pipeline and the Seaway pipeline, that’s going to what we think is going to call as an imbalance. So you’ll be looking for those volumes to start to find their way in some cases on the water to go out of Corpus Christi around the St.
James perhaps all the way around to Northeastern part of Canada. And then you’ve also got developments with respect to what qualifies for export while that has to be split into different products, but there’s certainly a need for more deal in South America.
And so, I think it’s just going to be something you’re going to have to monitor pretty actively and see what people are doing versus what they’re saying. And then if you start to see some of more that volume hit the water, going to alternative market that’s communicated to you is really a fundamental reason why there is a basis differential, why it need out there, and that’s the way you move it, as you basically find a better market to offset a differential, so that you can access the transportation.
So transportation plays a role in setting that differential.
Matthew Phillips – Clarkson Capital Markets
What is the cost to get to the different market?
Greg L. Armstrong
And so a lot of the refineries have limitations on being the amount of lightings that can handle witness, crude is while their new production is wider, and you could have more NGLs, more light antenna and I think I start to see some pricing differentiation between say, medium sweet and a light sweet or condensate, that if anything in longtime we ask. And you are also seeing the seasonality that we see happen.
We somewhat telling you in (inaudible) and you said that merits point in time with the amount of ethanol that’s being forced into the system and the demand for diesel elsewhere is that, gasoline could be viewed as certain portion of the years in the mid of a byproduct. So, that kind of sets the value for the lot into the barrels when you’ve got excess amount of gasoline that comes out of a naturally like barrels.
So it’s going to vary throughout the year, because of that.
Matthew Phillips – Clarkson Capital Markets
Okay, that makes sense. And I know in Phillips 66’s call last week, they had mentioned that they can add have some light capacity into their two new refinery, I mean, do you think are the refineries down in the Gulf Coast or in that position as well?
I mean do you expect that to be a meaningful expansion down there in the light crude run capacity?
Greg L. Armstrong
I think our refinery out there right now is trying to figure out behind the scenes, what they can do to increase their ability to run incremental volumes of light sweet and condensate. Will they choose to share that with the public for negotiating purposes; I mean what they’d love to be able to tell you is, we have no room at the analyst, you discount really big and then they’ll run it.
so if there is a constant amount of healthy tension between the producers and refiners with respect to trying to strike that balance, I think…
Harry N. Pefanis
The issue is going to be how much of that can be done without permitting and how much of it can be done or how much of it needs permits. So to the extent, refiners have the flexibility to tweak their inputs without obtaining permits.
it’s going to be a pretty good solution. but again, the permit that’s what we’re going to see, potential timing delays and being able to handle some of the light ends.
Matthew Phillips – Clarkson Capital Markets
Okay. thanks for the color guys.
that’s all I have.
Greg L. Armstrong
Thank you, Matt.
Operator
Thank you. Then our last question will come from the line of James Jampel of HITE.
Please go ahead
James M. Jampel – HITE Hedge Asset Management LLC
Thanks for taking the question. Looking at crude by rail in general, looking at the whole market, I realized that your guys’ facilities are largely contracted.
but with the collapse in spreads, are you seeing fewer railcars being loaded, you’re seeing railcars being turned back. And so who among the players were just be hearing most?
Greg L. Armstrong
Great question, it wouldn’t be beneficial as for trying and it really goes out. I would say we feel very comfortable about our inventory of opportunities and assets and railcars.
but clearly, there are some parties out there that don’t have the diversity of balance in the value chain and it’s probably just going to be a matter of time, before there is some additional pain out there and they realize, I believe, in those barrels is at break-even perhaps to the money lost in proposition, but I really wouldn’t want to engage in trying to pick out who those are.
James M. Jampel – HITE Hedge Asset Management LLC
What kind of activity decline are you noting out there in general?
Greg L. Armstrong
Well, I think, we are starting to see some transition back onto some of our pipelines maybe some activity pick up back and forth. And you’ll see it, James, I think you can monitor, there are months’ delay, but the pipeline volumes that are reported by different pipelines.
Enbridge clearly had seen a reduction in their activity on their pipelines and forecasted that when rail economics became difficult, they’d seen an increase in that, I would expect that to be true.
James M. Jampel – HITE Hedge Asset Management LLC
Okay, and thank you.
Greg L. Armstrong
Thank you.
Operator
There are no further questioners.
Greg L. Armstrong
Well, thank you, everybody for, again, dialing into the call and we look forward to updating you in November. Thank you.
Operator
And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference.
You may now disconnect.