Good morning, and thank you for standing by. Welcome to the PAA and PAGP Second Quarter 2023 Earnings Call. Please be advised that today's conference is being recorded.

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 at 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, and 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; 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.

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 a Permian gathering bolt-on acquisition on July 28, and we provided an update on our NGL segment optimization efforts at Fort Saskatchewan. These announcements reflect meaningful progress towards executing 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 wide-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 tenor 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 multiyear 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 combinations of these announcements are 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 in 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 back over to Al, I want to leave you with three messages. First, we've exceeded our EBITDA targets through midyear, 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 multiyear free cash flow, reducing leverage and increasing returns of capital to our unitholders. With that, I'll turn the call over to Al.

Thanks, Willie. We reported a 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 turnaround 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 3.5x. 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 announcements. With that, I'll turn the call back to Willie.

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 multiyear 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.

Thanks, Willie. Please continue with your questions. Additionally, the IR team will be available to address any further questions you may have. Michelle, we're now ready to open the call for questions.

The first question comes from Spiro Dounis with Citi.

First question, maybe to start with the guidance. From what I could tell, you all were trending probably towards the upper half of the range even before this bolt-on acquisition. So I'm curious, can you 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.

Yes, Spiro, I would describe the bolt-on as a relatively small component of the overall picture. The transaction is expected to close soon; in fact, it has already closed, so we're looking at five months moving forward, primarily due to the strong performance of the business.

Great. That's helpful. Thanks, Willie. Second one, just going to the NGL segment. So Train 2 didn't meet the hurdle rates. Curious, maybe 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?

Yes, I'm going to let Jeremy address that, but I want to start with a comment. There are many factors involved in this entire optimization project. However, it is important to remember that we are always focused on maintaining capital discipline and pursuing high-return options as we evaluate these possibilities. Jeremy?

Sure. Spiro, we were exploring alternatives and Chris and his team have found some lower-cost opportunities related to our Train 1 system. We were able to create a package that, along with some existing capacity we have to the east of Sarnia, meets our needs effectively. This approach has allowed us to achieve our goals in a much more capital-efficient manner. Our partner concluded that establishing a commercial arrangement rather than a partnership was the optimal solution to the issue.

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

Chris?

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 plants at 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 continues to be opportunities and we're excited to pursue them.

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.

The next question comes from Brian Reynolds with UBS.

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?

I believe there were two questions raised. Firstly, regarding intra-basin volumes, the acquisition does not affect those as it was a Midland Basin acquisition. We already operate in that area, so the gross volumes flow directly into Midland without any intra-basin aspects. As for your second question about overall expectations for the Permian, I can say that we have been exceeding expectations in the first part of the year. However, the last few months have lagged a bit. Activity this year has been generally in line, though it seems to be trending slightly below at this point. Nonetheless, productive capacity is still expected to improve. Ultimately, it will depend on the timing of completions during the second half of the year.

Brian, as you know, we encountered some weather issues in late June and July, primarily due to high temperatures. We also faced some gas plant problems, but producers have remained disciplined in avoiding flaring. Additionally, there was a decline in flat prices during that time, reducing the incentive to increase production. We believe that situation is behind us now. Oil prices have become more favorable, especially following the recent OPEC decisions that provide additional support. Looking ahead for the rest of the year, we have taken all these factors into account in our guidance outlook. Our volume guidance for the Permian is slightly below the 500 mark, but we still anticipate being at the upper end of our projected range.

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? Will those be fully worked through? And could that be a tailwind as we think about 2024 early numbers?

I see two pipelines that are currently facing deficiencies. The timeframe to resolve these deficiencies will extend over a few years, as they are still accumulating. It's important to understand that deficiency credits will be the last to be shipped, following the committed barrels and any spot barrels. From a capacity perspective, addressing the deficiency barrels will occur on a space-available basis, which means it will take time to work through them. It is likely to take a couple of years to fully resolve the situation.

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 discussed the Permian takeaway capacity on the Gulf Coast, and we have essentially made sales and contracts to protect that for the next predominantly for this year and '24. So that provides us a bit of a buffer, and we would expect the rates between Permian and the Gulf Coast to expand to ultimately cover incremental transportation costs.

The next question comes from Gabriel Moreen with Mizuho.

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, of your guidance, if you, I guess, annualize it. So I'm just wondering, is there a possibility you coming to the lower end of the CapEx range given that Permian volume outlook?

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

Yes. 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. And 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 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.

Understood. And then maybe on this M&A deal and a little bit of a 2-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 you're kind of done, what it's looking like?

I believe that when we purchase from a producer, it typically leads to an enhancement in our contractual relationship. We had previously established a partnership, but we have adjusted it to better suit our current role as the owner while the other party acts as the shipper or producer. Therefore, the terms have been revised to accurately reflect this new relationship. We maintain a strong relationship with Diamondback and are eager to expand our collaboration in this area.

The next question comes from Michael Blum with Wells Fargo.

So I just wanted to stay on this tuck-in acquisition here and just get your thoughts on whether this is kind of as 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?

So Michael, this is Willie. I mean, the way we look at this is we've got a great franchise 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-size 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?

No, Michael, I would just say that it's in line with the Advantage transaction. West acquired the Western interest in Cactus II last year and this one. This shows a trend, but as Willie mentioned, it needs to be beneficial for us and work for them. We will maintain our discipline. We explore many options, but they must compete for capital alongside our other potential uses.

Okay. Great. That helps. I just wanted to confirm that your long-term annual capital spending rates are unchanged in light of today's announcement regarding the investment in Canada.

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.

The next question comes from Keith Stanley with Wolfe Research.

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?

Sure, Keith. This is Jeremy. That contract was established around 25 years ago, and we are redefining our relationship with that counterparty. My perspective on this depends on how you view commodity exposure. We indicated that at $0.50, it would be advantageous, but at $0.70, it would not. You should consider the $200 million as a collection of projects. These include gathering projects and connectivity between facilities. The frac expansion is just a minor part of this. This is what makes the brownfield expansion unique. Overall, these are numerous projects with a variety of customer bases that are designed for the 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 into a reliable cash flow while altering the contractual terms with this customer as part of this process.

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.

Got it. And sorry, I'm going to stick with NGLs for my second question. Obviously, frac spreads came down a lot in Q2, although propane is kind of coming back with oil now. Can you comment at all on where you stand on 2024 exposure? And how open you are to pricing? And then relatedly, just looking at NGLs in 2024, these turnarounds seem like they have a pretty big impact this year, $50 million in Q2. So should we assume that turnaround impact would reverse and be a benefit in 2024 looking forward? Or how should we think about that?

Sure. There are two questions here. Regarding the turnaround, I don't expect any significant turnaround for next year. I don't believe the impact for this year was that substantial either. From a capital perspective, there is considerable maintenance capital required. From a cash flow perspective, you won't have that maintenance capital, and there will be some additional production. However, I don't think the impact will be around $50 million. Could you please repeat your other question?

We don't disclose our plans regarding frac spread exposure. While it's true that frac spread exposure has been high and has significantly decreased, we are seeing some improvement. We approach hedging carefully and strategically. As we head into 2024, we'll share more information at the end of the year, but the market conditions for the frac spread are getting better for that period.

The next question comes from Neal Dingmann with Truist Securities.

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 3.5x target?

Al? The first question was on capital. Neal?

For '24.

For '24, I would say $300 million to $400 million is what we're going to stick with for the next few years. Could you please ask your second question?

Yes, I understand you have a target of 3.5x. I'm curious, if you maintain your current free cash flow, can you go below that? Would you continue to go below it? How do you view the balance between payout and managing that debt?

Yes. At this point in the year, our guidance is that we expect to be a little below the 3.5x 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 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 3.5x or below.

Neal, does that answer your question?

The next question comes from Neel Mitra with Bank of America.

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?

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 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?

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 throttled wells that they had, maybe not complete all the wells that they were intending to, so that pushed completions into the August and forward time period.

The next question comes from Sunil Sibal with Seaport Global.

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 will get better economics on those? And if you could talk about kind of return on this kind of bolt-on acquisition.

Jeremy?

Sure. You're right. Since we operated the asset and held over 50% interest, it was consolidated, and the gross gathering volumes wouldn't change. That particular asset does not affect long-haul or intra-basin operations. We have mentioned before that this aligns us further with those who want to drill wells and maintain that partnership. They are very comfortable with our role as operators, making it logical for us to acquire that position. Diamondback can utilize that capital in any way it sees fit.

Okay. I'm curious about your approach to capital allocation. With the bond maturity coming up in the second half, it seems manageable. You're also aiming for leverage metrics higher than what you expect to see in 2023. Are you planning to create capacity for long-term initiatives? What is your long-term perspective regarding the leverage goal of 3.75 to 4.25?

Sunil, this is Willie. I'll share my views on capital allocation, and then Al can add his thoughts. When considering capital allocation, we focus on two main areas. First, it's essential to drive free cash flow since we can't make progress without it. Second, we must maintain discipline in all our activities, particularly regarding capital expenditures. As we plan for the future, our top priority is to uphold our commitment to returning capital to our unitholders, which is a key aspect of our capital allocation framework. Next, we will look at strategic, high-return projects that align with our business growth, opportunistic buybacks, and other initiatives, but these will take a backseat to ensuring financial flexibility and a robust balance sheet. That's the approach we're taking, and that's how I see our priorities. Al?

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.

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

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

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