Earnings Call Transcript - PAA Q2 2023

Blake Fernandez, Vice President of Investor Relations

Thank you, Michelle. Good morning, and welcome to Plains All American's second quarter '23 earnings call. Today's slide presentation is posted on the Investor Relations website under the News and Events section of plains.com where an audio replay will also be available following today's call. Important disclosures regarding forward-looking statements and non-GAAP financial measures are provided on Slide 2. Highlights from the quarter are provided on Slide 3. The condensed consolidating balance sheet for PAGP and other reference materials are located in the appendix. Today's call will be hosted by Willie Chiang, Chairman and CEO; and Al Swanson, Executive Vice President and CFO, as well as other members of our management team. With that, I will now turn the call over to Willie.

Willie Chiang, Chairman and CEO

Thank you, Blake. Good morning, everyone, and thanks for joining us. In our release earlier this morning, we announced strong second quarter results, along with the closing of the Permian Gathering Bolt-on Acquisition on July 28th, and we provided an update on our NGL segment optimization efforts at Fort Saskatchewan. These announcements reflect meaningful progress towards executing on our full-year '23 targets and goals. As a result of our year-to-date performance and the Bolt-on Acquisition, we now expect to be at the high end of our $2.45 billion to $2.55 billion adjusted EBITDA range for 2023. Our revised outlook also contemplates slightly lower-than-expected Permian production driven by lower commodity prices and some weather-related impacts that occurred in June and July. A high-level overview of our updated '23 guidance is located on Slide 4, and Al will share additional detail in his portion of the call. As summarized on Slide 5, our Permian JV acquired the remaining 43% non-operated interest in the OMOG JV from Diamondback Energy via a negotiated transaction for $225 million, or approximately $145 million net to Plains' interest, which was funded with excess free cash flow. This further aligns us with Diamondback in the core of the Midland Basin and is consistent with our objective of capital discipline and efficient growth complementing our existing footprint. With regard to updates on our NGL business optimization, a summary of today's announcements is provided on Slide 6. In summary, we sanctioned a 30,000 barrel a day Fort Sask Train 1 debottleneck and expansion. We also added connectivity projects to both our Co-Ed Y-grade gathering pipeline and our Fort Sask fractionation complex, which further integrates and expands our NGL system. We entered into commercial commitments substantially increasing the weighted-average contract tenure to 10 years across our Fort Sask fractionation capacity in our Co-Ed pipeline. Overall, we expect the NGL projects to generate unlevered returns in excess of our hurdle rate on approximately $200 million of investment capital. This multi-year investment fits within our previously communicated expectations for total average annual capital spend of $300 million to $400 million a year net to PAA over the coming years. Lastly, we have a third-party supply agreement that expires at the end of 2024, which reduces our overall frac spread exposed volumes by approximately 15,000 barrels a day. The combination of these announcements is expected to be EBITDA neutral in 2025 and beyond in a $0.55 to $0.60 per gallon frac spread environment, with the contributions from the Fort Sask expansion, associated connectivity projects, and Co-Ed pipeline agreements offsetting the expiry of the NGL supply agreement. Importantly, the end result is a more predictable and durable level of fee-based earnings in our NGL segment, underpinned by long-term contracts. Additionally, we're no longer exploring a joint-venture and a higher-cost expansion of Train 2 at the Fort Sask facility as it did not meet our required return thresholds. Before turning the call over to Al, I want to leave you with three messages. First, we've exceeded our EBITDA targets through mid-year, and we expect to be at the high end of our full-year guidance range. Second, we closed an attractive Permian Bolt-on Acquisition that further improves our Permian footprint in an efficient, disciplined manner. And third, we announced several strategic actions in our NGL segment, which will help improve the long-term durability and the quality of our cash flow stream over time. All of these actions align with our goals of remaining capital disciplined, generating multi-year free cash flow, reducing leverage, and increasing returns of capital to our unitholders. With that, I will turn the call over to Al.

Al Swanson, Executive Vice President and CFO

Thanks, Willie. We reported second quarter adjusted EBITDA attributable to PAA of $597 million. This includes benefits from increased volumes across our systems in our Crude Oil segment. As mentioned on our last call, the NGL segment experienced lower sales volumes as a result of planned turnarounds and seasonally weaker demand. Slides 11 and 12 in today's appendix contain walks, which provide more detail on our second-quarter performance. An overview of our updated 2023 guidance is located on Slide 7. As a result of business performance in both our Crude Oil and NGL segments year-to-date, and the partial benefit of the OMOG acquisition, we now expect to be at the high end of our full-year adjusted EBITDA guidance of $2.45 billion to $2.55 billion. We continue to expect year-over-year growth in our Crude Oil segment driven by Permian tariff volume increases. For the NGL segment, we remain highly hedged and do not expect a material impact from the lower frac spreads or Canadian wildfires. Shifting to capital allocation, as illustrated on Slide 8, we remain committed to one, significant returns of capital to our equity holders; two, continued capital discipline; and three, reducing debt and increasing financial flexibility. For 2023, we expect to generate $2.5 billion in cash flow from operations, $1.6 billion of free cash flow with $600 million of free cash flow after distributions available for net debt reduction resulting in year-end leverage below 3.5 times. We will continue to self-fund $325 million and $195 million of 2023 Investment and Maintenance capital net to PAA, which is consistent with previous guidance and includes the anticipated capital related to today's NGL announcement. With that, I will turn the call back to Willie.

Willie Chiang, Chairman and CEO

Thanks, Al. Today's results reflect another quarter of strong execution, and we remain very confident in our ability to continue delivering on our goals and initiatives. Macro uncertainty continues to drive volatility in both the crude and NGL markets. However, we previously took steps to proactively mitigate this risk by entering into a combination of short-term crude contracts and hedges in the long-haul crude business, along with our substantial hedge position in our NGL business. Over the long-term, Plains remains well positioned as North American supply will continue to be critical to meeting growing global demand. As previously outlined in our capital allocation framework, we remain focused on continuing to meaningfully increase returns of capital to unitholders through targeted multi-year distribution growth. We have a 7.5% distribution yield, significant free cash flow generation, and balance sheet strength, as shown on Slide 9. We appreciate your continued interest and support, and we will look forward to providing further updates on our earnings conference call in November. With that, I'll turn the call over to Blake to lead us into Q&A.

Blake Fernandez, Vice President of Investor Relations

Thanks, Willie. As we enter the Q&A session, please limit yourself to one question and one follow-up. For those with additional questions, please feel free to return to the queue. This will allow us to address questions from as many participants as practical in our available time this morning. Additionally, the IR team will be available to address any additional questions you may have. Michelle, we're now ready to open the call for questions.

Operator, Operator

The first question comes from Spiro Dounis with Citi. Your line is open.

Spiro Dounis, Analyst

Thanks, operator, and good morning, everybody. First question, maybe to start with the guidance. From what I can tell, you were trending probably towards the upper half of the range, even before this Bolt-on Acquisition. So I'm curious if you could maybe speak to how much of that upgraded outlook is legacy operations versus the Bolt-on. It sounds like maybe there could be some puts and takes into the end of the year.

Willie Chiang, Chairman and CEO

Yes, Spiro, the way I would characterize it is the Bolt-on is really a smaller piece of the amount. The transaction is expected to close here, hasn't closed yet. So, actually it has closed, so it's going to be five months, but it's predominantly over-performance in the business.

Spiro Dounis, Analyst

Great, that's helpful. Thanks, Willie. Second one just going to the NGL segment. So Train 2 didn't meet the hurdle rate. Curious if you can just go through some of the dynamics there and maybe what could bring that project back on to the burner here. And, then beyond what's been announced today in Canada, anything else you're still pursuing around optimization there.

Willie Chiang, Chairman and CEO

Yes, I'm going to let Jeremy touch on that, but I want to open with one comment on this. When you think about all the things, there's a lot of moving parts around this whole optimization project. But the thing to think about is we always drive for the capital discipline high-return option as we think about these options. Jeremy?

Jeremy Goebel, Manager

Sure. Spiro, I think the way to think about it is we were looking at alternatives. Chris and his team have identified some lower-cost brownfield opportunities around our Train 1 system. The comment, we were able to offer a package that between that and some existing capacity we have in the East at Sarnia, we're able to meet our needs through doing that. So we found a substantially more capital-efficient way to get to the same place, and hence our partner decided that a commercial arrangement versus a partnership was a better way to solve the problem.

Spiro Dounis, Analyst

Understood. In terms of Canada and optimization, is the situation different now, or are you still more likely to be in the background?

Chris Chandler, Managing Director

Good morning, Spiro, this is Chris Chandler. We continue to find some pretty compelling opportunities across our system. Of course, we just talked about the opportunities in Edmonton at our Fort Sask facility. But we also have the NGL extraction plant site, Empress, outside of Medicine Hat, and as Jeremy mentioned, we have some unutilized capacity at our Sarnia, Ontario fractionation facility. So we look at ways to optimize all of those, and we're making small targeted investments to further grow our business in all those areas. So I think there are continuing opportunities, and we're excited to pursue them.

Willie Chiang, Chairman and CEO

And Spiro, the way these things typically work, as you build some of these things out, you end up finding additional optimization opportunities. So it's kind of a continuing process as we go through things.

Spiro Dounis, Analyst

Great. I'll leave it there. Have a good weekend, everybody.

Willie Chiang, Chairman and CEO

Thanks, Spiro.

Operator, Operator

The next question comes from Brian Reynolds with UBS. Your line is open.

Brian Reynolds, Analyst

Hi, good morning to everyone. Maybe just as a follow-up to the guidance update. Just kind of questions around your intra-basin volumes going forward, just given the pure acquisition that took place in 2Q or whether you're seeing any fundamental shifts in the back-half Permian volume expectations. Thanks.

Al Swanson, Executive Vice President and CFO

Okay, so I think there's two questions there. On intra-basin volumes, the acquisition doesn't impact us. This is a Midland Basin acquisition, so it basically is something we already operate, so gross volumes flow straight into Midland. There's no intra-basin component to it. As far as I think your second question was overall expectations for the Permian. What I would say is the first part of the year, we're exceeding expectations. The last few months have been behind a bit. The activity so far this year has been largely in-line. I'd say it's trending a little bit below at this point, but its productive capacity is still there to get there, so it's going to be a function of timing of completions in the second half of the year.

Willie Chiang, Chairman and CEO

Spiro, as you know, we faced some weather challenges in late June and July, primarily due to hot conditions and some gas plant issues. The producers remained disciplined and avoided flaring. Additionally, the flat price was lower during that time, which likely reduced the incentive to produce. We believe we've moved past that now. Oil prices appear more favorable, especially with today's OPEC decisions providing additional support. As we look ahead to the rest of the year, we've factored all this into our guidance outlook. Our volume guidance for the Permian is slightly below 500, but we still anticipate being at the high end of the annual range.

Brian Reynolds, Analyst

Great. I appreciate all that color. And then maybe as a follow-up, can you just give us an update on the minimum volume commitments that are being worked through in 2023? And how we should think about that as we look ahead into 2024? Would those be fully worked through and could that be a tailwind as we think about 2024 early numbers?

Jeremy Goebel, Manager

The way I would look at it is that there are two pipelines that are accruing deficiency. I would say that the time period to work through those deficiencies, they're still accruing some on the pipelines. So I would view it as something that's going to take a few years to work through. Just because of the other commitments on the pipeline, you have to look at it as using deficiency credits as the last barrel that's shipped, the barrels that are committed ship first, any spot barrels are next, and then the deficiency. So from a capacity standpoint, working through the deficiency barrels on a space-available basis, so that takes time to get through. It will take probably a couple of years to do that.

Willie Chiang, Chairman and CEO

And Brian, our outlook hasn't changed. We still expect the spreads to strengthen as capacity shrinks with increasing production. As you probably know, we've chatted about on the Permian takeaway capacity of the Gulf Coast, we've essentially made sales and contracts to kind of protect that for the next, predominantly for this year and '24. So that gives us a little bit of buffer, and we would expect that the rates between Permian and the Gulf Coast should expand out to ultimately incremental transportation costs.

Brian Reynolds, Analyst

All makes sense. Appreciate the time. Enjoy the rest of your morning.

Willie Chiang, Chairman and CEO

Thanks, Brian.

Operator, Operator

The next question comes from Gabriel Moreen with Mizuho. Your line is open.

Gabriel Moreen, Analyst

Hi, good morning, everyone. I was wondering if you can maybe speak to your CapEx outlook for this year in light of a little bit of the tweaking to the Permian outlook. You're running a little bit late, I think, with your guidance, if you I guess, annualize it. So I'm just wondering, is there a possibility you're coming a little lower end of the CapEx range given that Permian volume outlook?

Willie Chiang, Chairman and CEO

Gabe, Chris Chandler will cover that. There's a lot of work that we go through to keep capital discipline across the company. Chris?

Chris Chandler, Managing Director

Yes, good morning, Gabe. We do continue to optimize our spend for 2023. Speaking in buckets, for our gathering system projects, we're pacing our investment timing with our customer schedules. Willie mentioned some color there with leaving a period of some adverse weather and lower prices, we expect that to kind of pick up in the second half of the year. On Permian infrastructure investments, we do have complete projects as needed to match expected production growth in the different regions of the Permian. So we try to time that appropriately. And then remember, we just announced a new NGL project at Fort Sask and we're going to be able to fund the 2023 portion of that project within our existing guidance of $325 million net to Plains for 2023. So there are some moving parts there, but we're reiterating our current guidance for the year.

Gabriel Moreen, Analyst

Understood. Thanks, Chris. And then maybe on this M&A deal and a little bit of a two-parter. One is, to what extent when you do these gathering deals within the JV, are you either extending or renewing further downstream commitments? I realize that may be a commercially sensitive question to ask, and then just kind of lay the land in terms of getting more of these gathering acquisitions? And kind of done what it's looking like.

Jeremy Goebel, Manager

Sure. I believe that when we purchase from a producer, it typically enhances the contractual relationship. Initially, we had a partnership, but we adjusted it to better suit our role as the owner while they act as the shipper or producer. Consequently, the terms were strengthened to better reflect that relationship. We maintain a strong relationship with Diamondback and are excited about the potential for growth with them in this area.

Gabriel Moreen, Analyst

Great, thanks.

Operator, Operator

The next question comes from Michael Blum with Wells Fargo. Your line is open.

Michael Blum, Analyst

Thank you. Good morning, everyone. So I just wanted to stay on this tuck-in acquisition here and just get your thoughts on whether this is kind of a one-off opportunity, or do you think there's going to be other potential kind of tuck-in deals here that we should expect to see over the next couple of years?

Willie Chiang, Chairman and CEO

So Michael, this is Willie. I mean, the way we look at this is we've got a great presence across North America, particularly around the Permian. And if there's anyone that can extract synergies in these opportunities, it should be us. But we're going to remain very, very disciplined as we approach this. And so when you think about what we might do, it's things like these Bolt-on Acquisitions, bite-sized Bolt-on Acquisitions that make a lot of sense to us. So I would expect that we are going to continue to look at opportunities there and if there are strong return projects that are strategic and meet the hurdle rates of our returns, we are going to consider them. But we've got to stay disciplined and we look at a lot of things, and we end up with a few. Jeremy, anything to add on this?

Jeremy Goebel, Manager

No, Michael, I would just say that it's consistent with the advantage transaction, the West interest in Cactus II last year in this one. So this is a trend, but it's something like Willie said, it's got to fit for us. It's got to work for them. We're going to be very disciplined. As we said, we look at a lot, but it's got to compete for capital with the rest of our potential uses.

Michael Blum, Analyst

Okay, great, that helps. And then just in light of today's announcement on the Canada investment that you're going to be making. Just wanted to confirm that your long-term kind of annual capital spend rates are unchanged.

Willie Chiang, Chairman and CEO

I'll take that one. Absolutely. We expect to stay between the $300 million to $400 million range as we go forward. We've said average because there could be some lumpiness in some of the timing around the projects, but you can expect us to stay within that range for a number of years.

Michael Blum, Analyst

Thank you.

Willie Chiang, Chairman and CEO

Thank you.

Operator, Operator

The next question comes from Keith Stanley with Wolfe Research. Your line is open.

Keith Stanley, Analyst

Hi, good morning. I wanted to stay on the frac expansion project. And so just want to clarify, the project is EBITDA neutral in 2025 and beyond because of the existing contract rolling off. I assume that existing contract you have is in the money or favorable in some way. Could you just give more color on the dynamics there on why the EBITDA from the project itself would be offset?

Jeremy Goebel, Manager

Sure, Keith. This is Jeremy. The contract was established around 25 years ago, and we are now altering our relationship with that counterparty. In my view, it depends on how you perceive commodity exposure. We provided an indication that at $0.50, it would be beneficial, while at $0.70, it would not be. However, it’s important to consider the $200 million as a collection of projects that include gathering efforts and connectivity between facilities. The frac expansion represents only a small part of this. This brownfield expansion is distinct in that it comprises a range of projects with various customer bases over a long term. We are enthusiastic about the stability and predictability of the cash flow. Essentially, we are converting one-third of our frac spread exposure to stable cash flow, while also modifying the contractual relationships we have in servicing this customer as part of this endeavor.

Willie Chiang, Chairman and CEO

And Keith, maybe to add one thing. This just reinforces the integrated system we have, but when you really look at it, we talk about our saddle and the seasonality of it. It goes back to trying to increase a portion of our cash flow to the fee-based side, and it should flatten that saddle as we go forward. So we think that predictable more durable earnings long term should help as far as we think about valuation for our units.

Keith Stanley, Analyst

Thank you. I have a follow-up question regarding NGLs. Frac spreads decreased significantly in Q2, although propane is starting to recover alongside oil. Could you share your thoughts on your exposure for 2024 and your flexibility regarding pricing? Additionally, in relation to NGLs for 2024, it seems that this year's turnarounds had a substantial effect, with a $50 million impact in Q2. Should we expect the turnaround impact to reverse and provide a benefit in 2024, or how should we approach this?

Jeremy Goebel, Manager

Sure. There's two questions there. On the turnaround, I don't think we have any material turnarounds projected for next year. And I don't think the impact was quite that big for this year. So I would view it from a capital standpoint, yes, there's substantial maintenance capital that goes into them. But so from a cash flow standpoint, you won't have the maintenance capital, and you'll have some additional production. But I don't think the impact is in the neighborhood of $50 million. Your other question, can you repeat that?

Willie Chiang, Chairman and CEO

Really, frac spread exposure, and I'll take this. Keith, we don't disclose what we're going to do on frac spread exposure. You're right, frac spread exposure were high. They've come off significantly. They're coming back. And what I would tell you is we look at - we try to time and be very thoughtful about how we do hedge forward. And as we go forward into 2024, we'll probably share - we'll definitely share more at the end of the year, but the market is improving as far as the frac spread environment for 2024.

Keith Stanley, Analyst

Thank you.

Willie Chiang, Chairman and CEO

Thank you.

Operator, Operator

Please standby for the next question. The next question comes from Neal Dingmann with Truist Securities. Your line is open.

Neal Dingmann, Analyst

Thanks guys. Can you just talk about twofold, one on the '24 CapEx, expand a little more detail. And then secondly, just on capital allocation around that 3.5 target? Thank you.

Willie Chiang, Chairman and CEO

Al?

Al Swanson, Executive Vice President and CFO

For '24, I would $300 million to $400 million is what we're going to stick with for the next number of years. And your second one, could you re-ask your second question? Neal, are you still there?

Neal Dingmann, Analyst

I'm sorry, I just got cut off for one second.

Willie Chiang, Chairman and CEO

Did you hear my comment on '24 CapEx? '24 CapEx will be $300 million to $400 million, consistent with our targets across the years. And then could you ask your second question on capital allocation?

Neal Dingmann, Analyst

Yes, just on - I know you've got the 3.5 target. So I'm just wondering, would you - if you keep - what we have for free cash flow, you can get below that? Would you keep taking it below? Or how do you think about sort of payout versus taking that debt load?

Al Swanson, Executive Vice President and CFO

Yes. At this point in the year, our guidance is that we expect to be a little below the 3.5 times at year-end. Clearly, a function of that will be what is our working capital requirements in the back half of this year that can move it a little bit. Our stated range still remains 3.75% to 4.25%. And as we've articulated over the last few quarters, we intend to operate below that for the near term. And so really, there's no really other moving part. If we get a little extra cash flow, we'll reduce debt in the back half. But the rest of the capital allocation is lined out. Clearly, if we're successful with another Bolt-on Acquisition, that can change the dynamic a little bit. But we do still expect to be at that 3.5 times or below.

Willie Chiang, Chairman and CEO

Neal, does that answer your question?

Neal Dingmann, Analyst

Yes. Thank you.

Willie Chiang, Chairman and CEO

Okay. Thank you.

Operator, Operator

Please standby for the next question. The next question comes from Neel Mitra with Bank of America. Your line is open.

Neel Mitra, Analyst

Hi, Thanks for taking my question. Willie, I think you alluded to some of the issues in the second quarter with just Permian growth and seeing that in your slides with gathering, intra-basin and intra-basin. And I was wondering if you could just speak to some of the issues that were faced in the second quarter. I think some of your peers alluded to this, but just wanted to understand what underpinned some of the production issues that are now resolved?

Willie Chiang, Chairman and CEO

Yes. In my earlier comments, Neel, it really was a lot of hot weather issues that affected gas processing. And what we've seen is the producers have remained very disciplined around not wanting to flare and you also had a lower price environment that probably didn't give people an incentive to try to push any harder. So, there's capital discipline and the producers had. And it was really back half of June and July. And since then, it's kind of improved. I don't know if there's more that you were looking for, I don't know. Jeremy, do you have anything to add?

Jeremy Goebel, Manager

Yes. I would say a lot of that led to producers not completing wells into that environment. So they're going to produce what they had, they throttle wells that they had, maybe not complete all the wells that they were intending to, that pushed completions into the August and forward time period.

Neel Mitra, Analyst

Okay. Perfect. And then for my second question, I wanted to understand how you're looking at recontracting Cactus II, maybe with, when it extends ahead of possibly a competitor coming out with an open season or if that affects how you look at recontracting. I know that the forward curve has improved. So just your general thoughts on the long-haul type recontracting? Thank you.

Jeremy Goebel, Manager

Sure, Neel. What I would say is we continue to have constructive dialogue with our customers. The back end of the view of prospective rates hasn't been nearly as volatile at the front end. So those discussions continue. There's options to extend on the Cactus II pipeline at attractive rates for our customers. So that one is pretty clear. I'd say for Cactus I and others, our integrated business model and asset base provide us unique advantages and align us with our customers for long periods of time. So, we fully expect to do that as a function of when and timing, and we'll update you guys when we have more information.

Neel Mitra, Analyst

Thank you very much.

Operator, Operator

Please standby for the next question. The next question comes from Sunil Sibal with Seaport Global. Your line is open.

Sunil Sibal, Analyst

Yes, hi. Good morning, everybody. So, I just wanted to understand a little bit better about the Bolt-on Acquisition. So it seems like those volumes are already reported as part of your gathering volumes and just that you will get better economics on those? And if you could talk about kind of return on this kind of Bolt-on Acquisition?

Willie Chiang, Chairman and CEO

Jeremy?

Jeremy Goebel, Manager

Sure. You're correct. Because we operated the asset and had over 50% interest that was consolidated and the gross gathering volumes wouldn't change. That specific asset doesn't impact long-haul or intra-basin. I think we said it before, it just further aligns us with - they want to drill well and be in it. They feel very comfortable with the relationship with us as operators. So it makes sense for us to acquire that position. And Diamondback can recycle that into however it wants to use this capital.

Sunil Sibal, Analyst

Okay. And then second is a little bit broader question on capital allocation. So it seems like the bond maturity you have coming up in the second half, you should be able to take care of that. And it seems like you still want to target higher than where you will end up in 2023, in terms of the leverage metrics. So I'm just kind of curious, is this geared towards more of - kind of creating capacity for perhaps taking out perhaps over a longer period of time? Or what are the kind of longer-term thought processes in terms of that leverage goal of 3.75% to 4.25%?

Willie Chiang, Chairman and CEO

Sunil, this is Willie. I'll give you my thoughts on capital allocation, and then Al can certainly add to it. As we think about capital allocation, there's two primary things. One, we need to drive free cash flow. You don't - you can't do anything if you're not driving free cash flow. And the second one is really around disciplined around everything we do, but particularly on CapEx. So as we think of the order and what we - how we allocate going forward. One, we want to protect our commitment to return capital to the unitholders. We laid out this capital allocation framework. So that's going to be high on the list. And then we go to strategic high-return Bolt-on projects that we will consider that makes sense to help us efficiently grow the business, opportunistic buybacks and the press are probably further down the list. Because we want to maintain financial flexibility and a strong balance sheet. So, that's what we kind of juggle back and forth. But as you think about the priority and the way I see it, that's kind of the way that the order. Al?

Al Swanson, Executive Vice President and CFO

Yes. No, that is accurate, Willie. I would add, yes, the note we have coming up in October, $700 million. We exited June with $900 million of cash, so that will be repaid out of that. Again, as I commented on an earlier question, we've left our leverage target the same at 3.75% to 4.25% and intend to operate at the low end or below. And that is partially to have some capacity on our balance sheet, to be able to weather through the industry ups and downs as well as be able to fund things as we need to. Ultimately, at some point in the future, we will look to address the press, but there's no near-term plan to do that. But over time, we would expect that would be a good use of some of that capacity. And hopefully, it would be taking those out with that. We don't believe we should be using common equity at this time due to the valuation.

Sunil Sibal, Analyst

Good. Thanks.

Operator, Operator

I show no further questions at this time. I would now like to turn the call back to the company for closing remarks.

Willie Chiang, Chairman and CEO

Thanks. Well, listen, everyone, thanks for your time and joining us this morning. We hope to see you soon and have a nice weekend.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.