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Commitments and Contingencies
 12 Months Ended
Dec. 31, 2011
Commitments and Contingencies  
Commitments and Contingencies

Note 11—Commitments and Contingencies

 

Commitments

 

We have commitments, some of which are leases, related to real property, equipment and operating facilities. We also incur costs associated with leased land, rights-of-way, permits and regulatory fees. Future non-cancelable commitments related to these items at December 31, 2011, are summarized below (in millions):

 

 

 

2012

 

2013

 

2014

 

2015

 

2016

 

Thereafter

 

Total

 

Leases (1)

 

$

71

 

$

55

 

$

47

 

$

41

 

$

33

 

$

292

 

$

539

 

Other commitments (2)

 

34

 

21

 

19

 

15

 

11

 

47

 

147

 

Total

 

$

105

 

$

76

 

$

66

 

$

56

 

$

44

 

$

339

 

$

686

 

 

(1)             Includes capital and operating leases as defined by the FASB guidance.

 

(2)             Primarily includes third-party storage and transportation agreements and pipeline throughput agreements.

 

Expenditures related to leases for 2011, 2010 and 2009 were $60 million, $52 million and $55 million, respectively.

 

Litigation

 

General. In the ordinary course of business, we are involved in various legal proceedings. To the extent we are able to assess the likelihood of a negative outcome for these proceedings, our assessments of such likelihood range from remote to probable. If we determine that a negative outcome is probable and the amount of loss is reasonably estimable, we accrue the estimated amount. We do not believe that the outcome of these legal proceedings, individually or in the aggregate, will have a materially adverse effect on our financial condition, results of operations or cash flows. Although we believe that our operations are presently in material compliance with applicable requirements, as we acquire and incorporate additional assets it is possible that the Environmental Protection Agency (“EPA”) or other governmental entities may seek to impose fines, penalties or performance obligations on us (or on a portion of our operations) as a result of any past noncompliance whether such noncompliance initially developed before or after our acquisition.

 

New Jersey Department of Environmental Protection v. ExxonMobil Corp. et al. In June 2007, the NJDEP brought suit in the Superior Court of New Jersey against GATX, ExxonMobil and our subsidiary, Plains Products Terminals LLC (“PPT”), to recover natural resources damages associated with, and to require remediation of, contamination at our Paulsboro terminal facility. ExxonMobil and GATX filed third-party demands against PPT, seeking indemnity and contribution. The natural resources damages were settled with the State of New Jersey. The Settlement Agreement was approved by the court in September 2011. PPT’s allocated share of this liability was $550,000, which was paid in November 2011.  We remain in dispute with ExxonMobil regarding future remediation responsibility as well as allocation of prior remediation costs.

 

Bay Area Air Quality Management District (“BAAQMD”). During the time period from 2008 to the present, we have received from BAAQMD various notices of violation for alleged violations of California air emissions regulations at our Martinez terminal. In December 2011, we entered into a settlement agreement with BAAQMD, pursuant to which we paid $116,000 in penalties.

 

Pemex Exploración y Producción v. Big Star Gathering Ltd L.L.P. et al. In a case filed in the Texas Southern District Court, Pemex Exploración y Producción (“PEP”) alleges that certain parties stole condensate from pipelines and gathering stations and conspired with U.S. companies (primarily in Texas) to import and market the stolen condensate. PEP does not allege that Plains was part of any conspiracy, but that it dealt in the condensate only after it had been obtained by others and resold to Plains Marketing, L.P. PEP seeks actual damages, attorney’s fees, and statutory penalties from Plains Marketing, L.P. At a hearing held on October 20, 2011, the Court ruled that Texas law (not Mexican law) governs the actions.

 

Environmental

 

General

 

Although we believe that our efforts to enhance our leak prevention and detection capabilities have produced positive results, we have experienced (and likely will experience future) releases of hydrocarbon products into the environment from our pipeline and storage operations. As we expand our pipeline assets through acquisitions, we typically improve on (reduce) the releases from such assets (in terms of frequency or volume) as we implement our integrity management procedures, remove selected assets from service and invest capital to upgrade the assets. However, the inclusion of additional miles of pipe in our operations may result in an increase in the absolute number of releases company-wide compared to prior periods. These releases can result from unpredictable man-made or natural forces and may reach “navigable waters” or other sensitive environments. Whether current or past, damages and liabilities associated with any such releases from our assets may substantially affect our business.

 

At December 31, 2011, our estimated undiscounted reserve for environmental liabilities, including the reserve related to our Rainbow Pipeline release as discussed further below, totaled approximately $74 million, of which approximately $12 million was classified as short-term and $62 million was classified as long-term. At December 31, 2010, our estimated undiscounted reserve for environmental liabilities totaled approximately $66 million, of which approximately $10 million was classified as short-term and $56 million was classified as long-term. At December 31, 2011 and December 31, 2010, we had recorded receivables totaling approximately $47 million and $5 million, respectively, for amounts probable of recovery under insurance and from third parties under indemnification agreements.

 

In some cases, the actual cash expenditures may not occur for three to five years. Our estimates used in these reserves are based on information currently available to us and our assessment of the ultimate outcome. Among the many uncertainties that impact our estimates are the necessary regulatory approvals for, and potential modification of, our remediation plans, the limited amount of data available upon initial assessment of the impact of soil or water contamination, changes in costs associated with environmental remediation services and equipment and the possibility of existing legal claims giving rise to additional claims. Therefore, although we believe that the reserve is adequate, costs incurred may be in excess of the reserve and may potentially have a material adverse effect on our financial condition, results of operations or cash flows.

 

Rainbow Pipeline Release

 

On April 29, 2011, we experienced a crude oil release on a remote section of our Rainbow Pipeline located in Alberta, Canada. Upon detection of the release, approximately 45 miles of the pipeline were isolated and depressurized and emergency response personnel were mobilized to conduct clean-up operations in cooperation with the Alberta Energy Resources Conservation Board (“ERCB”). After completing the pipeline repair and responding to additional regulatory requested pipeline inspections and information requests, we received regulatory approval and restarted full operation of the pipeline on August 30, 2011. We completed the remaining site clean-up, reclamation and remediation activities in December 2011, and have demobilized all equipment and personnel from the site.  Post-reclamation environmental monitoring will continue in accordance with regulatory requirements.

 

The aggregate total estimated cost to clean up and remediate the site, before insurance recoveries, was approximately $70 million, which was accrued to field operating costs on our consolidated statement of operations. While we believe this amount to be final, there is a small amount of work that will require completion during the spring of 2012 with regard to monitoring and land contouring. The costs associated with this work are not expected to be material.

 

As of December 31, 2011, we have a remaining undiscounted gross environmental remediation liability for the release of approximately $2 million. This liability is presented as a current liability within the caption “Accounts payable and accrued liabilities” on our consolidated balance sheet. We maintain insurance coverage, which is subject to certain exclusions and deductibles, to protect us against such environmental liabilities. As of December 31, 2011 we have a remaining receivable of approximately $41 million for the portion of this liability that we believe is probable of recovery from insurance, net of deductibles. This receivable has been recognized as a current asset within the caption “Trade accounts receivable and other receivables, net” on our consolidated balance sheet with the offset reducing operating expense on our consolidated statement of operations.

 

Environmental Remediation

 

We currently own or lease, and in the past have owned and leased, properties where hazardous liquids, including hydrocarbons, are or have been handled. These properties and the hazardous liquids or associated wastes disposed thereon may be subject to CERCLA, RCRA and state and Canadian federal and provincial laws and regulations. Under such laws and regulations, we could be required to remove or remediate hazardous liquids or associated wastes (including wastes disposed of or released by prior owners or operators) and to clean up contaminated property (including contaminated groundwater).

 

We maintain insurance of various types with varying levels of coverage that we consider adequate under the circumstances to cover our operations and properties. The insurance policies are subject to deductibles and retention levels that we consider reasonable and not excessive. Consistent with insurance coverage generally available in the industry, in certain circumstances our insurance policies provide limited coverage for losses or liabilities relating to gradual pollution, with broader coverage for sudden and accidental occurrences.

 

In conjunction with our acquisitions, we typically make an assessment of potential environmental exposure and determine whether to negotiate an indemnity, what the terms of any indemnity should be and whether to obtain environmental risk insurance, if available. These contractual indemnifications typically are subject to specific monetary requirements that must be satisfied before indemnification will apply, and have term and total dollar limits. For instance, in connection with the purchase of former TNM pipeline assets from Link in 2004, we identified a number of environmental liabilities for which we received a purchase price reduction from Link and recorded a total environmental reserve of $20 million, of which we agreed in an arrangement with TNM to bear the first $11 million in costs of pre-May 1999 environmental issues. TNM also agreed to pay all costs in excess of $20 million (excluding certain deductibles). TNM’s obligations are guaranteed by SOP. As of December 31, 2011, we had incurred approximately $22 million of remediation costs associated with these sites, while SOP’s share has been approximately $11 million.

 

Other assets we have acquired or will acquire in the future may have environmental remediation liabilities for which we are not indemnified.

 

We have in the past experienced and in the future likely will experience releases of crude oil into the environment from our pipeline and storage operations. We also may discover environmental impacts from past releases that were previously unidentified.

 

Insurance

 

A pipeline, terminal or other facility may experience damage as a result of an accident, natural disaster or terrorist activity. These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage and suspension of operations. We maintain insurance of various types that we consider adequate to cover our operations and certain assets. The insurance policies are subject to deductibles or self-insured retentions that we consider reasonable. Our insurance does not cover every potential risk associated with operating pipelines, terminals and other facilities, including the potential loss of significant revenues.

 

The occurrence of a significant event not fully insured, indemnified or reserved against, or the failure of a party to meet its indemnification obligations, could materially and adversely affect our operations and financial condition. We believe we are adequately insured for public liability and property damage to others with respect to our operations. With respect to all of our coverage, we may not be able to maintain adequate insurance in the future at rates we consider reasonable. As a result, we may elect to self-insure or utilize higher deductibles in certain insurance programs. For example, the market for hurricane-or windstorm-related property damage coverage has remained difficult the last few years.  The amount of coverage available has been limited, and costs have increased substantially with the combination of premiums and deductibles for the 2010 renewal totaling 20% or more of the coverage limit.

 

For the two years prior to June 2011, we purchased a hurricane limit of $10 million to cover property and business interruption, representing substantially the level of insurance that was available. The coverage provided by these policies contained much stricter limitations than the insurance policies available prior to hurricanes Rita and Katrina. As a result of these conditions, we did not renew this coverage in June 2011 and do not plan to purchase this coverage for 2012. We will, instead, self-insure this risk. This decision does not affect our third-party liability insurance, which still covers hurricane-related liability claims and which we have renewed at our historic levels. In addition, although we believe that we have established adequate reserves to the extent such risks are not insured, costs incurred in excess of these reserves may be higher and may potentially have a material adverse effect on our financial conditions, results of operations or cash flows.