Plains All American Pipeline, L.P.
Q1 2009 Earnings Call Transcript

Published: 7 May 2009

[Operator:]

Greetings and welcome to Plains All American Pipeline's First Quarter 2009 Results Conference Call. During today's call, participants will provide forward-looking comments on the Partnership's outlook as well as review the results of the prior period. Accordingly, in doing so, they will use words such as believe, estimate, expect, anticipate, et cetera. The Partnership intends to avail itself of Safe Harbor provisions that encourage companies to provide this information and directs you to the risks and warnings set forth in Plains All American Pipeline's most recently filed 10-K, 10-Q, 8-K and other current and future filings with the Securities and Exchange Commission. In addition, the Partnership encourages you to visit its website at www.paalp.com, in particular, the section entitled Non-GAAP Reconciliation, which presents certain commonly used non-GAAP financial measures such as EBITDA, EBIT, which maybe used here today in the prepared remarks or in the Q&A session. This section also presents a reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures and includes a table of selected items that impacts comparability with respect to the Partnership's reported financial information. Any reference during today's call to adjusted EBITDA, adjusted net income and the like is a reference to the financial measure, excluding the effect of the selected items impacting comparability. Today's conference call will be chaired by Greg L. Armstrong, Chairman and CEO of Plains All American Pipeline. Also participating in the call are Harry Pefanis, Plains All American's President and COO and Al Swanson, Plains All American's Senior Vice President and CFO. I'll now turn the call over to Mr. Greg Armstrong.

[Greg L. Armstrong:]

Thank you, operator. Good morning and welcome to everyone. I would also point out that Pat Diamond, our Vice President responsible for Strategic Planning and Roy Lamoreaux, PAA's Manager of Investor Relations as well as several other members of our management team are presently available for the question-and-answer session that will follow at the end of our prepared remarks. As a reminder, the slide presentation we will be referring to in this call is available on our website at www.paalp.com. Yesterday afternoon, Plains All American reported first quarter operating financial results that exceeded the high end of our guidance range. These results were generated by solid contributions from our fee and fee equivalent activities in all three of our business segments. Additionally, our Marketing segment capitalized on the contango market conditions and favorable volatility experienced during the first quarter of 2009. These results once again highlight our ability to generate low-risk, baseline plus results during favorable market conditions. In addition to discussing the details of our first quarter results, during the course of today's call, we will be covering information that supports the two major takeaway points listed on slide three. That is

[Harry N. Pefanis:]

Thanks Greg. During my portion of the call, I'll review our first quarter operating results compared to the midpoint of our guidance issued on February 11, 2009 and discuss the operational assumptions used to generate our second quarter 2009 guidance and discuss the progress of our expansion capital program. Let me begin with our operating results for the first quarter. As shown on slide seven, adjusted segment profit for the Transportation segment was $117 million or $0.45 per barrel, which exceeded the high end of the guidance range. Total volumes of approximately 2.9 million barrels per day were just slightly below our guidance. Crude oil pipeline volumes were off by about 29,000 barrels per day, and that was primarily due to the fact that our new pipeline system into Salt Lake City came in a little later than forecasted. Volumes in our refined products pipelines were off by about 20,000 barrels per day, and that was primarily due to an extended refinery turnaround in the Rocky Mountain region. But lower tariff revenues in the quarter were more than offset by lower than forecasted operating expenses as utility costs and costs related to some of our integrity projects came in lower than anticipated. Adjusted segment profit for the Facilities segment was $47 million, or $0.27 per barrel, which was just above the high end of our guidance range. Average capacity was 58 million barrels per month, which was in line with the guidance of 59 barrels per month. The slight variance in volumes was due to lower volumes in service in our California facilities. Most of the over performance for the quarter was due to lower operating expenses, again, primarily related to utility and integrity costs. Adjusted segment profit for the Marketing segment was $107 million, or $1.36 per barrel, compared to the guidance midpoint of $89 million and $1.09 per barrel. Marketing volumes were 869,000 barrels per day, which were approximately 41,000 barrels per day below our guidance. About 17,000 barrels per day of shortfall was associated with our foreign import activities, and this is a component of our business that will tend to have more ups and downs in volumes based on short-term opportunities. The bulk of the remaining volume reduction was associated with our LPG activity as we sold 21,000 barrels per day less LPG than forecast. But as Greg mentioned, we were able to offset the volume loss by realizing higher margins on the volumes actually sold. The higher margin sales were associated with customer requests to lift volumes in the first quarter of this year that were originally scheduled to be lifted in the 2009, 2010 winter season. Accordingly, we estimate that approximately $7 million to $10 million of the first quarter segment profit was merely a shift in timing of earnings. The segment also benefited from the strong contango market structure in the quarter, which averaged $3.69 per barrel and actually traded as high as $8.49 per barrel on the NYMEX. Maintenance capital expenditures were $22 million for the first quarter. We currently expect maintenance capital expenditures for the full year of 2009 to be approximately $80 million, which is the higher end of our previous $70 million to $80 million guidance range. Let me now go over the operational assumptions used to generate our second quarter 2009 guidance, which was furnished in our Form 8-K issued last night and is shown on slide eight. For the Transportation segment, we expect volumes to be approximately 3 million barrels per day. This is slightly higher than the first quarter volumes, primarily due to a few refineries being brought back into service after turnarounds as well as additional volume on the new Salt Lake City line that went into service in March. I would note that we are forecasting our refined product volumes to be a bit lower than year ago levels as we expect lower demand on these systems. Facilities segment guidance is based on forecasted volumes of 55 million barrels per month of crude oil, refined product and LPG storage, an average of 20 BCF per month of natural gas storage and an average of 17,000 barrels per day of LPG processing throughput volumes or a total of 59 million barrels of capacity per month. The increase over the first quarter volume is primarily due to the fact that we are placing new tankage in service at our St. James and Paulsboro facilities in June. Marketing segment guidance includes

[Al Swanson:]

Thanks Harry. During my portion of the call, I will address our capitalization, liquidity and 2009 guidance. As summarized on slide 11, we ended the first quarter of 2009 with a solid capitalization and liquidity position, which was well in line with our targeted credit metrics. At March 31, 2009, our long-term debt to total capitalization ratio was 47%, our adjusted EBITDA to interest coverage multiple was 5.3 times. And based on our midpoint of our 2009 adjusted EBITDA guidance, our long-term debt to adjusted EBITDA ratio was 3.3 times. Our short-term debt at the end of the first quarter was approximately $600 million, which represents a reduction of approximately $400 million from December 31, 2008. This short-term debt is primarily associated with hedged inventory and will be repaid with the cash proceeds received when the inventory is liquidated. Including short-term debt, our total debt to capitalization ratio was 51%, which is well within our target guideline of 60% or better. In mid-March, we completed an overnight marketed equity offering which, including the underwriters' over-allotment option and the 2% GP contribution, resulted in the sale of 5.75 million limited partner units at $36.90 per unit, resulting in net proceeds of $210 million. The offering was priced at an all-in discount of 5.3% to our closing price the day of launch and the vast majority of this offering was sold to the retail market. At March 31, we had 1.5 billion of available committed liquidity, including 1.3 billion of availability under our 1.6 billion revolving credit facility and approximately 170 million of availability under our 525 million hedged inventory facility. This compares to 1 billion of available committed liquidity at year-end 2008 and reflects the seasonal reduction in LPG inventory borrowings, rotation from higher cost inventory to lower cost inventory, our strong operating results and routine working capital fluctuations as well as the application of the proceeds from the March equity offering. The Partnership's long-term debt balance at March 31, 2009 was approximately $3.2 billion. On April 20th, we completed an offering of ten year senior notes which resulted in net proceeds of $347 million. The offering was priced to yield 8.75%, which compared favorably to transactions that were priced in late 2008 and 2009. The proceeds from this offering effectively refinanced the August maturity and further strengthened our liquidity. As shown on slide 12, pro forma for the 350 million notes offering and the August retirement of 175 million senior notes, our long-term debt as of March 31st is 98% fixed at an average rate of 6.7% with an average tenor of 12 years. Also, pro forma for the offering, we had 1.8 billion of committed liquidity at March 31st, this would be 1.7 billion after giving effect to the August debt maturity. We believe that PAA has a durable capital structure and liquidity position. Excluding the impact of acquisitions or modifications to our expansion capital program, we forecast that we will end 2009 with approximately $1.2 billion of liquidity, which takes into account the repayment of 175 million of senior notes that mature in August, seasonal inventory requirements, our expansion capital program and routine working capital swings. This roll forward calculation is presented on slide 13. For purposes of illustrating the durability of our liquidity position, we have prepared a similar roll forward to the end of 2010 based on assumptions that we believe are reasonable. This forecast indicates PAA's liquidity will approximate 900 million to 1.1 billion. We believe this level of liquidity and its duration position PAA to be able to both withstand an extended period of economic weakness and to take advantage of opportunities that are likely to exist in such an environment. In the second half of the year, we began disclosing the amount of initial margin and variation margin we have posted with the NYMEX and the Intercontinental Exchange. As of March 31st, our initial margin requirement was $84 million while the variation margin returned $126 million back to us, effectively resulting in no margin posted and a net credit of $42 million. Slide 14 summarizes our margin requirements for March 31st and for each of the quarter ends since mid-2008. Let me now move on to guidance. The highpoints of our guidance, which excludes selected items impacting comparability between periods are summarized on slide 15. For more detailed information, please refer to the 8-K that we furnished last night. We forecast second quarter adjusted EBITDA to range from $215 million to $235 million with an adjusted net income ranging from $97 million to $122 million or $0.48 to $0.67 per diluted unit. This guidance is meaningfully lower than both our performance and our original guidance range for the first quarter. Second quarter results are typically lower than first quarter due to the seasonal reduction in LPG sales. However, due to the expected continuation of solid fundamental performance and the expected benefit of contango margins in the second quarter, our second quarter guidance reflects a slight improvement over our original expectations when we put together our annual plan. For the full year of 2009, we are forecasting adjusted EBITDA to range from $952 million to just over $1 billion with adjusted net income ranging from $484 million to $549 million or $2.67 to $3.17 per diluted unit. The midpoint of this adjusted EBITDA range represents an increase of $17 million or 2% over our original guidance for the year. Our guidance for the second half of the year takes into account the realization of higher LPG margins during the first quarter. Our forecast also assumes that the contango market conditions and favorable volatility we have experienced thus far in the first half of 2009 will not extend through the full year of 2009. We hope that that proves to be a conservative assumption, but we believe that it is a prudent approach. All that said as shown, on slide 16, based on achieving our midpoint guidance and maintaining our current distribution level, our implied distribution coverage ratio for the year is a healthy 111%. Further, we have sufficient coverage to support a meaningful increase in distribution and still maintain solid coverage ratios. With that, I will turn the call back over to Greg.

[Greg L. Armstrong:]

Thanks Al. We're pleased with PAA's first quarter performance. We certainly have a positive outlook for the remainder of 2009 and we like our overall financial positioning. In our February conference call, we shared our view that global economic and financial market conditions were likely to linger into early to mid 2010, but not throughout 2010. Although certain parts of the financial markets appear to have somewhat stabilized recently, as I noted at beginning of this call, we remain cautious about the challenges being encountered by the global economic and financial markets. Accordingly, we have taken and will continue to take deliberate actions to position the Partnerships for a potential protracted period of economic weakness. Importantly, these actions position PAA to play offense, defense or a combination of the two. We have further strengthened what we believe to be one of the strongest balance sheets and liquidity positions in the MLP sector. As the projection that Al shared with you illustrates, PAA's liquidity position is not committed to fund large capital projects that are already in progress, but is available for unforeseen developments and attractive expansion opportunities that are not included in our current growth outlook. We believe that PAA possesses the financial firepower to opportunistically consummate a sizeable acquisition or expansion capital project at an attractive rate of return without straining its balance sheet or worrying about financing contingencies. While our liquidity position should enable us to move decisively to pursue attractive acquisitions in almost any environment, we will continue our disciplined approach to financing our growth with at least a 50% balance of equity and excess cash flow and maintaining the high level of liquidity. In summary, we have excellent capitalization and liquidity and our assets and business model are performing as designed. We are cautiously optimistic about the future and believe that PAA continues to represent an attractive investment opportunity that combines a substantial current yield with a solid foundation for continued growth. Prior to opening the call up for questions, I would also mention that on the afternoon of Thursday, June 10th, we plan to host an Analyst Meeting in New York City. If you wish to attend and have not yet responded, please advise our Investor Relations team at 713-646-4222. The meeting will also be webcast live with participation instructions provided at a later date. This concludes our prepared remarks for this morning. We thank you for your joining us today and we appreciate your continued support and we look forward to updating you on our next call. Operator, at this time, we can open the call up for questions.

[Operator:]

Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of Gabe Moreen with Bank of America - Merrill Lynch. Your line is now open. You may proceed.

[Gabe Moreen:]

Hey good morning guys. Question on potential distribution increases for the remainder of the year. I guess Greg in your mind, is any one metric out there that you're overweighting relative to others that I guess we should be focused on, whether it's fixed income, market improvements, MLP equity valuation improvements, or just broader economic backdrop? Just trying to gauge what you are thinking there.

[Greg Armstrong:]

Gabe, good question. We aren't going to provide guidance. I can say that we are pretty... we have had 29 straight quarters which goes over seven years of delivering on our guidance. And we need to be able to do that, to continue to do that to obviously drive future growth. I don't want to sound like a Cassandra with respect to the future, but we are probably not as convinced at this point in time that the fundamentals of the economy have actually... are supporting the enthusiasm we are seeing in the financial markets. And so we are a bit cautious. I would say that what we're looking for is confirmation that the fundamental economic groundwork has stabilized and we just... we haven't seen that yet. So we'll continue to be cautious. I think when we... as we did already, by increasing the distribution at this point, we recognized that our positioning is very strong and that the markets that really paralyzed, if you will, back in September of 2008 through really November to early December of 2008... that part of it has seemed to have melted a little bit and that is encouraging. Bottom line is it says quality companies can access the market. Maybe the costs are higher than they used to be, but they have access to capital. There was a period of time in there where there was not certainty that anyone would have access. I would say that we are just going to continue to monitor the market. We've got to deliver on our performance, but I think we'll continue to monitor it. If the current environment, the feel of the environment in the financial markets were to continue, I would say that would be a positive sign for future distribution growth. If it got much weaker, I think it is a positive sign for PAA to be able to use that liquidity to take advantage of opportunities.

[Operator:]

Thank you. Our next question comes from the line of Xin Liu with JPMorgan Chase & Company. Your line is now open.

[Xin Liu:]

Good morning, guys.

[Greg Armstrong:]

Good morning.

[Xin Liu:]

In terms of your... you apparently had a very low operating cost in your transportation segment. You mentioned it's due to lower fuel costs and the integrity expense. How much is it due to the lower fuel costs versus the other? And do you expect the cost... this kind of cost level to continue in the rest of the year?

[Al Swanson:]

I think it's close to 50

[Greg Armstrong:]

I would say the issue that always plagues anybody trying to do forecasts is we have seen certainly natural gas prices, diesel prices, crude oil prices come down. It is how fast do those decreased commodity prices that we see on the Bloomberg screens, et cetera, transfer to the field. What we have seen it has been a little more rapid than what we forecast. And so probably our projected cost across the board on expenses at the beginning of year was probably a little bit higher than we are currently experiencing. And depending on your commodity price outlook, if it stays in this environment, we should be able to have some net savings as we go forward.

[Operator:]

Thank you. Our next question comes from the line of Brian Zarahn from Barclays Capital.

[Brian Zarahn:]

Good morning.

[Greg Armstrong:]

Good morning, Brian.

[Brian Zarahn:]

On marketing, obviously contango had a favorable impact. Can you talk about how contango is impacting your gathering business?

[Harry Pefanis:]

Over the last few years we have shifted the way we price a lot of our lease gathering business. At one time probably 25% to 30% of our lease gathering business was negatively impacted by a contango market. That's probably less than 10% today. So it does have an impact. It was reflected in the first quarter results, but not nearly the magnitude as it would have had in prior years.

[Operator:]

Thank you. Our next question comes from line of Darren Horowitz with Raymond James and Associates. Your line is now open.

[Darren Horowitz:]

Hey, good morning, guys, congratulations on the quarter.

[Greg Armstrong:]

Thanks Darren.

[Darren Horowitz:]

Greg, from a transportation perspective, as I'm trying to get a sense of price-induced producer containments... what are you seeing around the Basin line and also on the west Texas and New Mexico systems? And is there any one area that gives you more concern than another if prices weaken into the middle of this year?

[Greg Armstrong:]

Darren, so far we're not seeing a lot of lower volumes coming out of west Texas overall. It kind of ebbs and flows. Clearly when there's reason for people to store in west Texas because of the contango and it really depends not only on the market but also the sweep of the spreads between... the basis differentials. But we had pretty high volumes in the first quarter on Basin.

[Harry Pefanis:]

And the Basin was... first quarter was influenced by a refinery in East Texas area that was out of service because of a fire late last year. So that refinery is back online. That will move off of Basin onto the west Texas Gulf system. So we have got forecasts at a little lower volumes second half of year than we did first quarter on Basin. And that's the primary driver. Buys have been good in West Texas. We are seeing drilling slowing down, so our forecast does have a little bit lower volumes as we move forward.

[Greg Armstrong:]

Darren, if you look at our 8-K, I think we have got average basin volume forecast at 370,000 barrels per day in the second quarter and we basically guided that down to 360,000 barrels a day in the second half. So we are anticipating ultimately that the slowdown in drilling will have an effect. So far as Harry said, for other reasons you can't really see it in the first quarter because of refinery upsells.

[Operator:]

Thank you. Our next question comes from the line of Gil Alexander (ph) with Darphil Associates. Your line is now open. You may proceed.

[Unidentified Analyst:]

Good morning, congratulations. I was wondering, could you share with us Rainbow profits in the first quarter?

[Greg Armstrong:]

Not... we don't give P&Ls on each of our pipelines. I can tell you that it is basically performing pretty much in line with our acquisition forecast and we are pretty pleased overall with everything. As you can tell, our guidance has been creeping up overall, and certainly that's been a component of that in terms of just the acquisition added to our base level of earnings and it's performing in line with the acquisition of it.

[Operator:]

Thank you. Our next question comes from the line of John Edwards with Morgan Keegan. Your line is now open.

[John Edwards:]

Good morning, everybody.

[Greg Armstrong:]

Good morning, John.

[John Edwards:]

Greg, you were mentioning... talking a little bit about Pier 400. I think that you were saying that you are about ready to get the... the permit period is about ready to allow you to proceed. And I was just wondering if you could give an expectation of when you think that that would come to fruition... assuming that you do get your permit on schedule.

[Greg Armstrong:]

John, we are being a little bit cautious in trying to predict that. I think that Harry indicated in his comments that we are looking at potentially being in a position to actually start construction, if everything was to fall in place within the next 12 to 18 months, which is probably as short a period as you've ever heard us talk about being able to actually take action in creating that asset. I think one of the issues has been as costs have risen quite a bit since the permitting process started, and clearly the economic environment for our customers is a little bit different now than when they... it was two years ago, is we are having discussions, as Harry mentioned, on how we can actually reduce the costs to make them have a project that works for their functional and operational needs and we have a project that works from our expected returns. So I would say we're very close in terms of coming over the hurdles that were hard to project before, which is regulatory, environmental. As Harry mentioned we have... the last appeal to protesting the EIR was --

[Harry Pefanis:]

Was denied.

[Greg Armstrong:]

Denied just recently. So we would hope to get that aspect cleared up by the end of May. But we still have opened the lease with the Port of LA, which is an economic issue, and then also the size and the rate of return that we need to make on our capital with our customers. And so we are allowing for that to take a little bit longer than perhaps optimism would say. And so that's why we put the 12 to 18 months out there.

[Harry Pefanis:]

And what we have done is we have accelerated engineering on some of the longer lead time items, so that as we... as we put the rest of these outstanding items to bed, we can hit the ground running and not lose time.

[Operator:]

Thank you. We do have a follow-up question coming from the line of Gabe Moreen from Banc of America. Your line is now open.

[Gabe Moreen:]

Good morning. Wondering if I could ask some questions on gas storage, specifically around expanding Pine Prairie further. I think that you had talked in the past about Caverns#4 and 5, so wondering what status is of those. And second question is given the widening of current storage summer-winter spread here, wondering if your marketing arm controls any capacity either at the new Pine Prairie caverns or at Bluewater?

[Greg Armstrong:]

To answer your last question first, at this point in time our marketing arm does not have any real storage at Pine Prairie. We have basically leased that out to third parties. Where we are in the expansion process... we have got two of the three caverns are in service now, a third cavern, which is scheduled to come online in the second quarter of 2010, and it's on schedule today operationally. We also filed on February 6th a permit to expand Pine Prairie from an aggregate 24 BCF to an aggregate 48 BCF, which will include adding, as you mentioned, two new caverns, what we'd refer to as 4 and 5. Each of those would be 10 BCF and then the incremental 4 BCF that is in the expansion permit would come from expanding caverns 2 and 3 from 8 BCF to 10 BCF. The normal process for expecting a response from both FERC and the Louisiana Department of Natural Resources would probably put us into the third to fourth quarter of this year. And we are hopeful that if we can get the permit at that time... we'll be taking all the steps necessary operationally to move with speed once... and if we get those permits, so that we could take advantage of what's clearly a much more favorable cost environment today than what we faced in 2005 and 2006. And clearly we also have the experience of knowing the peculiarities and the attributes of our particular drilling environment, and we also have the leaching facilities in place. So at that point in time, we believe that we can stamp out caverns pretty much with good definition on the time period to start and deliver that. We think that's a competitive advantage. We have our leaching system... I think, if you looked across the number of facilities out there, we are probably 1.5 to perhaps two times the leaching capacity. At ours, we can move about 8000 gallons a minute. That's over 240,000 barrels per day. And so that gives us the ability to handle new cavern development as well as dewatering any existing caverns as they are brought into service.

[Gabe Moreen:]

Thanks Greg.

[Greg Armstrong:]

Thank you.

[Operator:]

Thank you. [Operator instructions]. We have a follow-up question coming from the line of Brian Zarahn with Barclays Capital. Your line is now open.

[Brian Zarahn:]

Greg, can you give your perspective on what's been taking place so far this year in the May M&A activity that we are seeing and consolidation efforts? What do you expect to happen this year?

[Greg Armstrong:]

From an asset transaction standpoint, there's still a fair spread between the bid and ask between buyers and sellers. I think that you might have heard that on some other calls as well. I think that sellers are less proud of the assets they have to sell in recognizing that multiples that might have been available 18 months ago are no longer available. That said, I don't think that the gap has completely closed. You're just not seeing a lot of transactions announced. And we do think there are a lot of opportunities out there, which is part of the reason that we really went to develop our war chest and develop, if I can borrow a term from JPMorgan, a fortress balance sheet. As far as the MLP space goes, I think a couple of years ago we approached 75 MLPs. If you actually look at the list of MLPs... and Pat's here with me... I think you can see clearly that there's probably going to be a shrink of probably around 10 MLPs just because of the LPs acquiring the DP, or in some cases the LP and the GP being taken private. And so I think consolidation, the first wave of it has started, and that is to take out entities that either aren't necessary in this environment, whether it is a GP where they can't really help the growth, but they do hurt the cost of capital. And so those are happening now, but I think the true consolidation of MLP to MLP where there's institutional... or an industrial synergies will occur. They are very complex, but they are getting easier because the legal profession, the investment bankers and even directors are getting more comfortable. So personally I think you'll probably see five or six MLP mergers over the next 18 to 24 months. They take a while to do though. They are not going to happen in a hurry.

[Operator:]

Thank you. Our next question comes from the line of Gil Alexander with Darphil Associates. Your line is now open.

[Unidentified Analyst:]

Hi, good morning again. With the higher cost of capital, could you give us any guidance as to what return of capital targets you want for new projects and acquisitions?

[Greg Armstrong:]

Gil, it's an excellent question. And the... the answer is much higher than what we were looking for before. I think we believe it should be in the 300 to 500 basis points above the cost of capital. What determines where you are in that range is a number of items ranging from risk, if you are looking at very low risk, moderate growth, you could be in the lower end of that spread. If it's higher risk but higher potential, it could be in the higher end. And then there is obviously hybrids in between. But I would say we're pretty proud of our capital right now, both because it is more expensive, as you suggest, and we don't think that it is freely available to everyone as it used to be, even if you are going to pay the higher cost. And we think that we as management should be challenged to capitalize on that advantage, if you will, of having access to reasonable cost capital, higher than what it used to be... but still a reasonable cost and having a depth of market that allows us to do large deals or multiple moderate sized deals.

[Unidentified Analyst:]

Thank you.

[Greg Armstrong:]

Thank you, Gil.

[Operator:]

Thank you. Our next question comes from the line of Barrett Blaschke with RBC Capital Markets. Your line is now open.

[Barrett Blaschke:]

Yes, I was wondering if you have a target level that you are shooting for how much of storage would be reserved for client and how much would be third party over the long term?

[Greg Armstrong:]

Again, it depends a little bit on the reason. If it... we are building storage right now for example in Cushing. A portion of that is already committed to refiners that are going to use it regardless of market environment, and we really like that type of customer because they provide a level of liquidity and activity in any environment. And, again, we're a MLP, and while it's fun to make contango profits while they are there. It is a lot more fun to have a stable source of income throughout any environment. And we are not smart enough to figure out if the future is going to stay in contango or backwardation. My guess is it'll be a combination of the two. We do retain a certain amount of tankage always for... to help protect our lease business and optimize that value. And we are able to not only do that in the short term, but over the time in the future, we can actually enter into synthetic leases, which you see in our disclosure where we talked about how we can create value there. So right now, I think we have close to 11 million total, including --

[Harry Pefanis:]

11 million to 12 million barrels reserved for --

[Greg Armstrong:]

And that's out of 85 million system wide. And of that 11 million barrels, Barrett, several million barrels of that are associated with our foreign crude, which is really a fee-based business, but we handle it in our marketing activities because of way we do the buys and sells, and then a portion of that is basically for arbitrage opportunities where again we are able to synthetically underpin that with financial derivatives. And then a portion of it's available for the contango market opportunities.

[Barrett Blaschke:]

Okay. Thank you.

[Greg Armstrong:]

Thank you.

[Operator:]

Thank you. We do have another follow-up question from the line of Xin Liu with JPMorgan & Chase. Your line is now open.

[Xin Liu:]

Looking at your guidance for facilities, the second half, the per barrel margin ticked up. Is that mainly because of the gas storage that you put into service?

[Harry Pefanis:]

It's a combination of the gas storage, new tanks coming on at higher rates and just a little lower integrity costs forecasted in second half of year. A lot of the API 653 costs were scheduled to be incurred in the first half of the year.

[Xin Liu:]

Okay. Thank you.

[Operator:]

Thank you. At this time, there are no further questions. I would like to now turn the floor back over to management for closing comments.

[Greg Armstrong:]

Thank you. Thanks to everybody for participating in today's call and also for your continued attention and support, and we look forward to updating you on our progress and plans in the second quarter call.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you very much for your participation. Have a wonderful afternoon.