Before we get started with our prepared comments, I would mention that throughout the call, we'll refer to the companies by their respective New York Stock Exchange ticker symbols of PAA and PNG, respectively. As a reminder, Plains All American owns the 2% general partner interest and approximately 62% of the limited partner interest in PNG, which accordingly has been consolidated into PAA's results. In addition to reviewing recent results, we'll provide forward-looking comments on the partnership's outlook for the future. In order to avail ourselves the Safe Harbor precepts that encourage companies to provide this type of information, we direct you to the risks and warnings set forth in our most recent and future filings with the Securities and Exchange Commission. Today's presentation will also include references to certain non-GAAP financial measures such as EBIT and EBITDA. The non-GAAP Reconciliation section of our website reconciles certain non-GAAP financial measures to the most directly comparable GAAP financial measures and provides a table of selected items that impact comparability of the partnership's 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 Plain's.
Today's call will be chaired by Greg L. Armstrong, Chairman and CEO of PAA and PNG. Also participating on the call are Harry Pefanis, President and COO of PAA and Vice Chairman of PNG; Dean Liollio, President of PNG; and Al Swanson, Executive Vice President and CFO of PAA and PNG. In addition to these gentlemen and myself, we'll 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 Armstrong
Thanks, Roy. Good morning, and welcome to everyone. During today's call, we will discuss PAA's second quarter operating and financial results, our 2011 capital program, our financial position, our updated guidance for the third quarter and the remainder of 2011 as well as our overall outlook. We would also address similar information for PNG as well as provide an update on the natural gas storage markets.
Yesterday after market closed, Plains All American announced second quarter adjusted EBITDA of $366 million exceeding the high end of our guidance by $46 million, which is $61 million above the midpoint of the guidance range.
As shown on Slide 3, adjusted EBITDA, adjusted net income and adjusted net income per diluted unit for the second quarter of 2011 increased 48%, 87% and 96%, respectively over last year's second quarter and each were favorable compared to guidance. PAA's results were driven by solid performance in all 3 segments with the Supply and Logistics segment being the largest contributor to overperformance. Notably this overperformance includes the adverse impact of the Rainbow release which Harry and Al will discuss in their part of the call.
As shown on Slide 4, our second quarter results mark the 38th consecutive quarter of delivering results in line with or above guidance. Yesterday evening, we furnished financial and operating guidance for the third quarter and the balance of the year, increasing the midpoint of our full year 2011 guidance by $89 million. Additionally, last month, PAA declared a 4.2% year-over-year increase in our run rate distribution to $3.93 per unit on an annualized basis. As for the distribution payable next week, PAA will have increased its distribution in each of the last 8 quarters and 27 out of the last 29 quarters.
As highlighted by our strong results, the energy environment continues to be very favorable for PAA's assets and business model. PAA has executed well in this environment and we are on track to meet or exceed our 2011 goals. At the end of the day's call, I will provide some additional comments on our distribution outlook for both PAA and PNG, but for now, let me turn the call over to Harry.
Harry Pefanis
Thanks, Greg. During my portion on the call, I'll review our second quarter operating results compared to the midpoint of our guidance issued on May 4, 2011, discuss the operational assumptions used to generate our guidance for the third quarter and discuss our capital program. Dean will cover the PNG-specific information in a moment.
As shown on Slide 5, adjusted segment profit for the Transportation segment was $137 million or $0.49 per barrel which was in line with our midpoint guidance. Volumes in the segment were a little more than 3 million barrels per day and were also in line with our guidance, with stronger volumes on basin, our Line 63/2000 system and at the Permian Basin area systems partially offsetting lower volumes or lower than forecasted volumes of our refined products systems and the Rainbow Pipeline.
As noted in our press releases and our website update, we experienced a release on the Rainbow pipeline on April 29. The release site has been repaired, clean up efforts are ongoing and we're currently waiting on regulatory approval to place the line back in service. The aggregate second quarter economic impact totaled approximately $23 million net of expected insurance reimbursements. And Al will provide additional detail on this estimate and the cost during his part of the call.
Looking forward, we're cautiously optimistic that we'll receive regulatory approval to place the line back in service in the third quarter. However, for purposes of our guidance, we've modeled the restart in the fourth quarter of this year.
Moving on to the Facilities segment, adjusted segment profit for the facilities segment was $91 million or $0.37 per barrel, which totaled about $5 million above the midpoint of our guidance. Primary drivers of the overperformance were higher throughput-related fees in certain of our liquid terminal and favorable gas processing margins. Volumes of 82 million barrels for the quarter were in line with our guidance.
Adjusted segment profit for the Supply and Logistics segment was $136 million or approximately $1.82 per barrel. Segment profit was $54 million above the midpoint of our guidance, primarily due to improved lease gathering margins in certain areas with significant drilling and constrained takeaway capacity, as well as favorable differentials and market structure. The volumes were 818,000 barrels per day compared to our guidance of 850,000 barrels per day. On a sequential quarter basis, our lease gathering volumes were essentially unchanged, but were lower than forecasted for the second quarter. Weather and its impact on road conditions, particularly in the Rockies as well as various other transportation logistical issues in other areas, negatively impacted our actual volumes during the quarter.
The maintenance capital expenditures were $27 million for the quarter, and we're running a little ahead of a forecast on our maintenance capital projects. And accordingly, we've increased our projected maintenance capital expenditures to a range of $95 million to $105 million for the year.
Let me now move on to Slide 6 and review the operational assumptions used to generate third quarter midpoint guidance which was furnished in our Form 8-K last night. For the Transportation segment, we expect volumes to average approximately 3 million barrels per day, in line with the volumes for the first half of the year. The expected segment profit of $0.52 per barrel is slightly higher than the first half of the year. Remember, the first half of the year was burdened by the Rainbow Pipeline-related costs and additionally, the second half of the year reflects tariff increases on a number of our systems as a result of the FERC index adjustments.
Facilities segment guidance assumes an average capacity of 83 million barrels of oil equivalent with segment profit of $0.37 per barrel. The segment profit is in line with the second quarter results and the 1 million barrel equivalent capacity increase is primarily due to the completion of a portion of our latest expansion at our Cushing terminal.
Supply and Logistics segment guidance volumes are projected to average 830,000 barrels a day for the quarter with a projected midpoint segment profit of $1.15 per barrel. This volume includes the 2 million barrels of Strategic Petroleum Reserve barrels we purchased from the Department of Energy in the third quarter of this year. We expect margins in this segment to continue to be strong in the third quarter, but not as strong as they were in the second quarter.
We have a number of expansion projects in progress and we are more active than we've ever been. As noted on Slide 7, some of the noteworthy projects that have been completed and placed in service so far this year, include our Mid-Continent expansion project, our Basile gas processing plant near Pine Prairie, approximately 1.5 million barrels of new capacity or tank capacity at Cushing and expansion of our Mesa pipeline system. Our Mesa pipeline project increased capacity by approximately 100,000 barrels a day and corresponds with Sunoco Logistics' expansion of their West Texas Gulf System and our own expansion of the basin pipeline.
During the remainder of the year, we expect to complete our Bone Spring pipeline, the expansions at our Cushing and Bumstead facilities and a partial start up of our Ross terminal in the Bakken area.
Projects expected to be completed in 2012 include our Patoka expansion, the Basin Pipeline expansion, our new Eagle Ford pipeline and our Wascana reversal. And you'll notice that our guidance reflects capital expenditures for what we call Rainbow II pipeline, which we expect to be completed in the first half of 2013, pending the timely receipt of our applicable permits.
We have a number of other projects in progress. Although we expect to finalize our plans in the near term, we will expand our footprint in a number of liquids-based resource plays. In total, we have increased our guidance for our 2011 capital expenditures by $25 million to $625 million, which is reflected in Slide 8.
Actual expenditures to be incurred in 2011 are expected to range between $575 million and $650 million for the year, reflecting the uncertainties related to weather, scope changes and regulatory approvals, as some of these projects could either progress faster than anticipated or experience delays causing costs to slip into the first couple of months of 2012.
As you can see we've been very active and continuing to be very active in our pursuit of incremental growth opportunities, both organic and acquisition. And we look forward to updating you on these activities as they materialize. I'll now turn the call over to Dean for an update on our Gas Storage activities
Dean Liollio
Thanks, Harry. In my part of the call, I will review PNG's second quarter operating and financial results and provide an update on operational activities at each of our facilities. I will also review our updated assessment of the current market conditions with respect to natural gas storage.
As shown on Slide 9, PNG announced solid second quarter 2011 results, including adjusted EBITDA of $27.5 million, adjusted net income of $17.1 million and adjusted net income per diluted unit of $0.23, each of which reflects performance above the midpoint of our guidance range. This overperformance relative to midpoint guidance is primarily due to favorable Hub Services performance as well as lower expenses than forecast. A portion of the higher Hub Services revenue is due to the accelerated realization of certain short-term opportunities that were previously forecast to be recognized in the last half of the year. This timing adjustment has been factored into the guidance we issued yesterday evening.
Let me give you a quick update on activities in each of our storage facilities. At Pine Prairie, we placed cavern well 4 into storage service during the second quarter with an initial working capacity of over 8 Bcf. Including capacity additions due to fill and dewater activities, Pine Prairie's total working capacity is now over 32 Bcf. Leaching operations on cavern well 5 at Pine Prairie are fully underway and we remain on track to bring that cavern into storage service during the second quarter of 2012. Through cavern well 5 and opportunistic fill/dewater activities over the next 12 months, we anticipate increasing Pine Prairie's working capacity by an additional 9 Bcf to 10 Bcf, which would further increase the total working capacity of Pine Prairie to over 40 Bcf.
At Bluewater, we completed drilling 2 additional fluid withdrawal wells. Over the long term, these wells will increase our storage capacity as well as provide additional cash flow from oil production. We also remain on schedule to complete repairs to the gas handling portion of the Bluewater facility prior to the 2011/2012 winter withdrawal season.
At Southern Pines, the integration of the back office, commercial activity and operations have been completed. As noted in the last quarter's conference call, we experienced some delays in space creation due to some operational issues and received financial compensation from the sellers for certain of those matters.
We have now adopted many of the same operating practices at Southern Pines that we have developed at Pine Prairie. We also plan to make modifications to Southern Pines' manifold system and leaching system to improve operating flexibility and position us to cost effectively increase the space creation capability and make up some of the delays.
Since our last conference call, we commenced leaching operations on cavern well 4, and we expect to bring this cavern into storage service in the second half of 2012. We are also conducting solution mining under gas within existing caverns as market conditions permit.
In aggregate, our current forecast for 2011 capital expenditures is approximately $100 million, which is $3 million lower than the estimate provided at the beginning of the year. To accommodate changes in timing, scope, et cetera, we have included in our guidance a range on our projected capital investment of minus 4% to plus 2%. The reduced forecast and potentially lower year end total capital expenditures are attributable to the net effect of some timing adjustments and the fact that we expect our larger projects to end the year slightly below budgeted costs.
Overall, the first 7 months of 2011 have been very active and productive with respect to creating additional capacity integrating the Southern Pines acquisition and fine tuning our organization, and we are pleased with our activities in that regard. So all in all, the controllable or manageable elements of PNG business activities are progressing pretty much according to plan.
However, market conditions for natural gas storage, something that we obviously don't control, have deteriorated beyond what we had forecasted at the beginning of the year. With that in mind, let me spend a few moments addressing the primary factors that are driving the current market environment for Firm and Hub Storage services.
There are a couple of primary market indicators for storage values. First, our seasonal spreads or intrinsic value. In recent months, these spreads, which were already at a 3-year lows at the beginning of 2011, have continued to tighten significantly. The October to January spreads appear to have settled into a fairly tight range between $0.37 and $0.50 and are now near 5-year lows. As illustrated on Slide 10, this compares to spreads that range from approximately $1 to $2 less than 21 months ago.
The second item is volatility, which is a proxy for extrinsic value. As indicated on Slide 11, volatility measures are currently running only about 1/3 of the levels experienced 2 years ago and over 30% below the level at the beginning of 2011. We believe the fundamental drivers for the lower spread and reduced volatility levels include the following: First, there's been relatively balanced supply/demand picture. The rapid increase in shale production combined with a lack of non-weather related demand has been more than offset by record incremental weather-driven consumption over the past 3 seasons. Of a particular note, as illustrated on Slide 12, for the first time in 30 years, we have had 3 consecutive seasons of warmer or colder weather than the 30-year average. Given the extended heatwave currently impacting the U.S., it appears we may be lining up for a record fourth consecutive above-normal season. Absent the incremental demand from this abnormal weather estimated at 200 to 300 Bcf of additional demand during the summer of 2010, we believe the U.S. would have certainly tested the upper limits of storage capacity at the end of last injection season. Further contributing to this balanced supply/demand picture, colder than normal weather in Canada reduced supplies that would've otherwise been imported to the U.S. during the 2010/2011 season by an estimated 130 Bcf.
Second, there has been a change in the composition of gas supply with the declining percentage of production coming from the Gulf of Mexico and an increasing percentage of domestic production coming from onshore sources. The perception is that this change lowers the risk profile of natural gas supply. However, we believe that the combination of freeze off and the significant initial production declines associated with shale gas production present new and different risks related to stability of supply that are not yet fully appreciated by the market.
Finally, there is currently a high level of regional storage on storage competition resulting from both new build capacity and recontracting activity as term contracts on existing capacity expire in a weak market. Although other factors such as lower LNG import have also contributed, the bottom line is that supply and demand remain relatively balanced in the current market environment. And accordingly, there is a lack of concern or fear about running out of either gas supply or storage capacity.
For so long as this attitude prevails in the market, storage conditions will likely remain soft and firm storage rates will continue to be under pressure along with reduced hub service and optimization opportunity.
I should note, however, there are a few positive signs that could lead to a better market and more encouraging storage outlook. Number one, gas demand is expected to rise significantly over the next 5 years led by power generation growth from coal to gas switching, coal plant retirement and gas start capacity addition. Number two, a number of permitted new build storage facilities and expansions of existing facilities have been canceled or deferred, presumably due to market conditions.
And number three, recent actions at the FERC suggests that tightening of processes with respect to permitting both new facilities and expansions of existing facilities. Nonetheless, these positive long-term fundamental factors are not yet strong enough to cause us to change our near-term outlook, which envisions storage rates, service levels and short-term opportunities that are markedly different from our outlook at the time of PNG's IPO in early 2010 and also less favorable than our revised outlook provided during the first quarter of 2011. In fact, since our Analyst Meeting in June, continued historically low spreads and lack of volatility plus additional data points have led us to conclude that current market conditions are likely to persist for the near term.
On a relative basis, however, PNG's overall contract position is favorable for this environment and provides solid support for our cash flow over the next few years. For the 2011/2012 storage season, approximately 95% of our capacity is subject to third party contract, taking into account that we actively manage any disconnects between when storage is predicted to come on line and when our storage contracts begin. The majority of the remaining storage capacity for the 2011/2012 storage season is leased to our Commercial Optimization group. I would also note that the remaining tenure of our storage capacity leases to third parties ranges from 1 to 10 years with the remaining weighted average tenure of approximately 3.5 years.
Slide 13 provides a graphical representation of our cumulative contract position for the next several storage seasons. Our percentage capacity under third party contracts for the 2012/2013 season remains high at approximately 80%. The decrease from 95% to 80% is primarily associated with bringing additional capacity on as opposed to contract expiration.
With that description of market conditions and PNG's positioning, let me address our guidance for the balance of 2011. As shown on Slide 14, we have revised the midpoint of our adjusted EBITDA guidance for the full year of 2011 downward by approximately 2% to $104 million. Notably, this decrease in the midpoint of guidance was driven by decreasing the upper range from $111.5 million to $107 million driven primarily by the fact that we see less upside from Hub Services and optimization-related activity in this environment, as well as downward pressure on rates for uncontracted space. The lower end of the annual guidance range remain relatively unchanged at $101 million. We are forecasting adjusted EBITDA for the third quarter of 2011 to range between $24 million and $28 million, with the midpoint of $26 million. The implied midpoint for the fourth quarter of 2011 is approximately $31 million. As I mentioned earlier, our guidance for the second half of the year incorporates the accelerated realization of certain Hub Services activity into the first half of the year that was originally forecasted to occur during the second half of the year.
Included on Slide 15 is a condensed capitalization for PNG at June 30, 2011, PNG ended the second quarter with a debt-to-capitalization ratio of 25% and debt-to-adjusted-EBITDA ratio of 3.8x. Subject to covenant compliance, PNG's committed liquidity was $172 million at June 30. As a result, PNG is positioned to finance its projected organic growth capital for 2011 and 2012 without the need to access the capital markets.
We continue to believe PNG's solid capital structure, attractive contract portfolio and low cost expansion projects position PNG to grow and prosper. In fact, as a result of our attractive contract portfolio and the construction of additional storage space at very low unit costs, PNG is positioned to generate 15% to 20% growth in EBITDA in 2012 relative to our 2011 guidance midpoint even assuming the current market conditions persist through 2012. However, given the deterioration and market condition and the cloudiness of the near-term outlook, we have reviewed potential impacts to our distribution outlook and in his closing remarks, Greg will cover the scenarios we have considered in the conclusions we reached. With that, I'll turn it over to Al.
Al Swanson
Thanks, Dean. During my portion of the call, I will discuss capitalization and liquidity and provide comments on PAA's guidance for the third quarter and full year of 2011, as well as provide a summary of the financial impacts of the Rainbow incident.
As summarized on Slide 16, PAA exited the second quarter 2011 with solid capitalization, approximately $2.2 billion of committed liquidity and credit metrics that are favorable to our targets. At June 30, PAA's adjusted long-term debt-to-capitalization ratio was 44% and our total debt-to-capitalization ratio was 49%.
Our adjusted long-term debt balance was approximately $4.5 billion, which includes $500 million of notes used to fund hedged inventory. The total debt ratio includes $1 billion of adjusted short-term debt that supports our hedged inventory. This debt is essentially self-liquidating from the cash proceeds when we sell the inventory. For reference, our short-term hedged inventory at June 30, 2011 consisted of approximately 17 million barrels equivalent with an aggregate value of $1.45 billion. Our adjusted long-term debt to adjusted EBITDA ratio was 3.2x, and our adjusted EBITDA to interest coverage ratio was 5.9x.
As shown on Slide 17, PAA's consolidated long-term debt primarily consists of senior unsecured notes and including balances outstanding on the revolving credit facilities, has an average tenure of approximately 9 years. We have no maturities until September 2012 and approximately 93% of our long-term debt balance is fixed in an average rate of 5.9%.
I'll now move on to our guidance. The high point of our third quarter and annual 2011 guidance are summarized on Slide 18. For a more detailed information, please refer to the 8-K that we furnished last night.
We are forecasting adjusted EBITDA for the third quarter of 2011 to range from $310 million to $340 million with an adjusted net income ranging from $167 million to $207 million or $0.73 to $0.99 per diluted unit. The midpoint of our full year 2011 adjusted EBITDA guidance has increased to approximately $1.38 billion, a total increase of $159 million over our beginning of the year guidance, representing solid execution and strong industry fundamentals.
I would note that a significant portion of the strong performance in the Supply and Logistics segment is from our Lease Gathering business, which is benefiting from strong fundamentals as a result of first, higher volumes due to increased oil production related to the active development of crude oil and liquids-rich resource plays; and two, higher margins as a result of production volumes exceeding existing pipeline takeaway capacity in certain regions and the associated logistic challenges. Since a portion of this stronger performance is the result of these fundamental drivers versus market factors, we believe it is additive to our baseline cash flow.
Slide 19 outlines PAA's 2011 implied distributable cash flow based on the midpoint of our guidance range. Assuming achievement of our 2011 midpoint guidance and distribution growth goal, we expect to generate distribution coverage for the year of approximately 120%, highlighting that we should be in a position to retain approximately $160 million of cash flow in excess of distribution.
Before turning the call back to Greg, I wanted to provide some additional detail regarding the financial impact of the Rainbow Pipeline incident that Harry mentioned earlier. We currently estimate the response, clean up and remediation cost related to the incident will total approximately $72 million. In our second quarter financials, we have recorded this liability. However, since we maintain insurance for this type of incident, we have accrued a $59 million receivable, net of deductibles, for the portion we expect will be reimbursed by our insurance carriers. The remaining net $13 million was expensed in the quarter. We estimate the aggregate economic impact on the second quarter's results is $23 million, which includes a net $13 million expense and approximately $10 million in lost revenue associated with the release as well as the downtime associated with unrelated forest fires that occurred in the vicinity during May. I would mention that our estimates are subject to refinement in the future as we conduct the clean up and remediation operations and collect further information.
One final comment, in mid-May just after our first quarter earnings conference call, S&P affirmed PAA's BBB- credit rating and revised our outlook to positive from stable. We are very pleased with this acknowledgment of our increased size, diversity, solid fee-based cash flow and balance sheet strength.
With that, I'll turn the call over to Greg.
Greg Armstrong
Thanks, Al. As highlighted throughout today's call, PAA delivered excellent first half performance, reinforcing our belief that PAA's assets and business model are well positioned for the current environment. On the strength of this performance and our positive outlook in the second half of the year, we have increased the midpoint of our full year guidance for the second time and are currently targeting adjusted EBITDA for 2011 of $1,384,000,000. This represents a 13% increase over the $1,225,000,000 provided in the beginning of 2011.
We have also increased our quarterly distribution in each of February, May and August and are on track to meet our distribution goal for 2011, which is to pay a distribution in November of 2011 that is 4% to 5% higher than the distribution paid in November 2010.
Looking beyond 2011, we believe PAA is well positioned to deliver 3% to 5% distribution growth for the next few years, primarily through the advancement and execution of our large portfolio of organic projects. Furthermore, we remain very active and disciplined on the acquisition front. Based on our historical experiences, the addition of meaningful acquisitions will further enhance and extend our visibility and capacity for distribution growth over time.
I also want to make a few comments regarding PAA Natural Gas Storage or PNG. On a consolidated basis the Natural Gas Storage business is small relative to PAA as PNG comprises less than 8% of PAA's total adjusted EBITDA. Accordingly, at this early stage in PNG's growth cycle, even a material variation performance of PNG has a very minor impact on PAA. Nonetheless, PNG is a separate publicly traded entity under PAA's umbrella and our relationships with all of our stakeholders at PAA are very important to us.
As Dean highlighted in his comments, the controllable aspects of PNG's business strategy and business plan are generally on track. Unfortunately, most significant non-controllable factor, which is overall market conditions for natural gas storage, has deteriorated rather dramatically over the last 18 months. Clearly, markets change from time to time, but developments over the last few months suggest these conditions could be with us for a while. We believe PNG's existing contract portfolio and ability to add storage capacity at very low cost position PNG relatively well with respect to the weak storage markets. We also believe many of these storage market conditions will correct over time. All that said, however, we are clearly in new territory and the duration of the challenging market conditions is uncertain.
In refining our near-term and intermediate-term distribution outlook for PNG, we have run a number of scenarios that assume a variety of market conditions, including an extended duration of challenging market conditions. We have also considered the unique characteristics of PNG's capital structure, which includes common units, Series A subordinated units and Series B subordinated units.
Plains All American holds all of PNG Series A and Series B subordinated units, as well at $28.2 million or 48% of PNG's outstanding common units, plus the general partner's 2% interest in incentive distribution rights. As you may recall, the Series B subordinated units are noncash paying units that convert to Series A subordinated units upon receiving volumetric performance levels at Pine Prairie and PNG earning and distributing certain targeted distribution levels.
The volumetric performance benchmark for the first tranche of Series B subordinated units has been achieved. The first distribution threshold for those that tranche $1.44 per unit. Upon meeting the second task, $2.6 million Series B units will convert the Series A subordinated units and thus, begin participating in cash distributions.
In connection with the announcement of the Southern Pines acquisition in December 2010, we established a target to exit 2011 with the distribution of $1.45 per unit, which translated into a year-over-year distribution increase of 7.4%. Based on what at the time appeared to be conservative assumptions with respect to market conditions, we expected to be able to generate sufficient, distributable cash flow to, not only achieve the 2011 targeted increase but also as a result of adding new storage capacity at very low cost, to be able to continue to grow PNG's distribution at mid-single digits for the next several years. In effect, the market rates that existed in December of 2010, the addition of new storage capacity would more than reduce -- offset reduced revenues over the next few years associated with the recontracting of existing storage capacity under higher price contracts.
Given the subsequent further deterioration of market conditions, the uncertain duration of these conditions and unique aspects of PNG's equity capital structure, we have refined our targeted 2011 exit distribution level to PNG.
Taking a number of factors into consideration, we believe it's prudent to modify our target distribution level for the November 2011 distribution to $1.43 per unit as opposed to the previously targeted exit rate of $1.45 per unit. Achievement of this distribution level will still result in PNG growing its distribution by approximately 6% during 2011 versus the 7.4% that was targeted under more favorable market conditions. Notably, as a result of targeting distribution level below the distribution performance threshold for the first tranche of Series B units, PNG will have 2.6 million fewer units to service. This modification will increase coverage for PNG's common unitholders and secure a higher level of flexibility and financial strength for the PNG.
Reducing our target distribution exit rate for 2011 was not what we envisioned at the beginning of the year or even as recently as our June Analyst Meeting. However, PNG follows the same philosophy and practice as PAA of doing the right thing for the long term even when it may not be the most popular in the near term.
Looking beyond 2011, the volumetric growth of PNG storage capacity illustrated on Slide 19 is expected to offset or substantially mitigate the negative impact of any recontracting existing storage capacity at lower storage rates should these market conditions persist for an extended period. Although the deterioration in market conditions adversely affects our multiyear growth visibility from existing assets, we believe these conditions may well make acquisitions and consolidation more likely.
With that in mind, let me address PAA's strategic objectives for PNG. Plains All American formed PNG to create a growth platform for the Natural Gas Storage business and potentially for natural gas pipelines. Taking into account PAA's GP IDR structure and the substantially fee-based nature of PNG's business, PNG has a lower cost of equity capital than PAA and also provides the potential for like-to-like equity exchanges to assist us in consolidating the natural gas storage sector.
We continue to believe that this will prove a successful endeavor, perhaps even more so in a challenging environment, as we believe PNG is relatively better positioned than several other industry players not only with respect to its quality asset base and solid contract position, but also with a strong sponsorship and alignment of interest with Plains All American. Additionally, should market conditions improve and stabilize, PNG is very well positioned to generate meaningful growth just from operating and developing its existing asset base and PAA will participate in that growth in a meaningful way with its equity holdings and structural leverage provided by its ownership of PNG's incentive distribution rights.
In summary, the first half of 2011 has been a very productive period with solid execution of both PAA's and PNG's business plans as we have delivered solid performance relative to our operating and financial guidance.
Once again, thank you for participating in today's call and for your investment in PAA and PNG. We look forward to updating you on our activities during the third quarter call in early November. Shannon, at this time, we're ready to open the call up for questions.
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