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PAA Natural Gas Beats Overall

PAA MMP

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PAA Natural Gas Storage L.P. posted second-quarter 2012 operating earnings of 25 cents per unit, beating the Zacks Consensus Estimate of 21 cents and the year-ago figure of 23 cents per unit.

The results were driven by disciplined business strategy, well-positioned assets, a high percentage of multi-year fee-based contracts, and continued successful execution by the partnership.

Including the items that affect comparability between reporting periods, PAA Natural Gas reported earnings of 23 cents per unit compared with 22 cents per unit in the prior-year quarter on a GAAP basis.

Operational Update

Overall revenue at PAA Natural Gas Storage at the end of second-quarter 2012 was $100.1 million versus $54.4 million in the year-ago period, reflecting a significant growth of 84.2%. The figure also surpassed the Zacks Consensus Estimate of $57 million.

Revenue from Firm storage services was $35.5 million, marginally up 0.16% year over year. Hub services and merchant storage generated revenue of $64.3 million, up 253.3% year over year. However, revenues from Other declined 55.5% year over year to $330 million.

Operational Update

Storage related costs in the quarter under review spiked 213.6% year over year to $64.5 million. Field operating costs inched up 3.2% year over year to $3 million. Adjusted EBITDA during the reported quarter was $29.7 million, up from $27.5 million in the year-ago quarter driven by storage capacity expansions and increased hub services activities.

Financial Update

Current assets at the end of June 30, 2012 were $77.4 million, down from $0.376 million as of June 30, 2011. Current liabilities were $108.8 million, up from $37.2 million as of June 30, 2011. Notes payable to Plains All American Pipeline L.P. (PAA - Analyst Report) at the end of second-quarter 2012 was $200 million, flat year over year.

Cash Distribution

The new quarterly distribution rate of the partnership is 0.3575 cents per unit, or $1.43 per unit on an annualized basis, payable on August 14, 2012. The new distribution rate is in line with the quarterly distribution rate but shows an increase of 3.6% year over year.

Guidance

For the third quarter of 2012, PAA Natural Gas Storage expects Total Net Revenue to be in the range of $32.9 million to $35.9 million, adjusted EBITDA to be in the range of $25 million to $29 million and adjusted earnings per unit to be in the range of 18 cents to 24 cents.

During full-year 2012, the partnership expects Total Net Revenue to be in the range of $145.1 million to $151.1 million, adjusted EBITDA to be in the range of $116 million to $124 million and adjusted earnings per unit to be in the range of 95 cents to $1.08.

At the peer

Recently, one of company’s peers, Magellan Midstream Partners, L.P. (MMP - Analyst Report) announced strong second-quarter 2012 earnings, aided by higher demand and rates for its services. The Tulsa, Oklahoma-based oil distributor reported earnings per unit of $1.01 (excluding mark-to-market commodity-related pricing adjustments), surpassing the Zacks Consensus Estimate of 87 cents and the year-ago adjusted profit of 91 cents. Total revenue came in at $449.5 million, up 17.3% year over year, but was below the Zacks Consensus Estimate of $458 million.

Our View

PAA Natural Gas Storage performed well during the quarter beating our expectations. Moreover, the results were near the higher end of the partnership’s guidance range of 20 cents to 26 cents per unit.  Going forward, the partnership’s asset base, contract profile, financial position, low risk profile, economically attractive expansion projects, low-cost storage capacity additions at Southern Pines and Pine Prairie will help to add visibility to the story.

However, we remain concerned due to the fluctuation in natural gas prices, global capital and credit markets volatility, as well as regulatory risks. The partnership presently retains a short-term Zacks #3 Rank (Hold) rating.

PAA Natural Gas Storage, L.P. is a Delaware limited partnership formed by Plains All American Pipeline L.P. The partnership is engaged in acquisition, development, ownership, operation and commercial management of natural gas storage facilities and generates net revenue primarily from the provision of fee-based gas storage services to its customers. The partnership presently operates three natural gas storage facilities, which are located in Louisiana, Mississippi and Michigan.

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