Plains All American Pipeline LP (PAA) 2006 Q2 法說會逐字稿

Welcome to the Plains All American Pipeline's Second Quarter Earnings Conference Call.

During today's call, the participants will provide comments on the Partnership's outlook for the future as well as review the results of the prior period. Accordingly, in doing so, they will use words, such as "believes," "estimates," "expects," "anticipates," et cetera. The law provides Safe Harbor protection to encourage companies to provide forward-looking information. The Partnership intends to avail itself of those Safe Harbor provisions and directs you to the risks and warnings, set forth in Plains All American Pipeline's most recently filed 10-K, 10-Q, 8-K, and other current and future filings with the Securities & Exchange Commission.

In addition, the Partnership encourages you to visit Plains All American's website, at "www.paalp.com." In particular, the section entitled "Non-GAAP Reconciliation," which presents certain commonly used non-GAAP financial measures, such as EBITDA and EBIT, which may be used here today in the prepared remarks or in the Q&A session. This section also presents a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and includes a table of selected items that impact comparably with respect to the Partnership's reported financial information. Any reference during today's call to the adjusted EBITDA, adjusted net income, and the like is a reference to the financial measure, excluding the effect of selected items impacting comparability.

Today's conference call will be chaired by Greg L. Armstrong, Chairman and CEO of Plains All American Pipeline. Also, participating in the call are Harry Pefanis, Plains All American President and COO, and Phil Kramer, Plains All American's Executive Vice President and Chief Financial Officer.

I will now turn the call over to Mr. Greg Armstrong.

Thank you, Diego, and welcome to everyone. As a reminder, the conference call slide presentation is available for viewing or download at our website, at "www.paalp.com."

This morning, we announced strong second quarter results. As illustrated on slide four, we reported EBITDA of 119.6 million and net income of 80.3 million, or $0.81 cents per diluted units, representing increases of 25%, 29% and 9%, respectively, over similar results for the second quarter of 2005.

Excluding the selected items impacting comparability, which in the aggregate negatively affected results by a total of 8.6 million, second quarter adjusted EBITDA was 128.2 million and adjusted net income was 88.9 million, or $1.03 per unit. These adjusted results represent an increase of 11%, an increase of 8%, and a decrease of 7% respectively over the corresponding metrics in last year's second quarter.

Each of these financial measures was above the high end of the updated guidance that we provided on June 12th 2006. And notably, as shown on slide 5, this marks the 18th consecutive quarter that we Plains has delivered solid performance relative to its financial guidance.

Although we are only seven months into the year, 2006 has already been a very active and productive year for Plains All American. In addition to announcing our pending $2.4 billion merger with Pacific Energy Partners, we've also announced and completed seven additional acquisitions for aggregate consideration of approximately 572 million.

The majority of the cash flow associated with these acquisitions is fee-based. We are also in the process of executing our 2006 expansion capital program that will set the stage for continued fundamental growth.

With respect to the merger, Plains and Pacific filed a preliminary joint proxy statement and prospectus with the SEC on July 11th 2006, and that is available through PAA website. We announced earlier today that the waiting time under HSR for the proposed merger expired at 11:59 P.M., Eastern Time, yesterday.

The expiration of the HSR waiting period satisfies one of the conditions contained in the merger agreement, dated June 11th 2006, between Plains and Pacific. We also received a no-issue letter from the Canadian Competition Bureau and the accompanying waiting period under the Competition Act has expired.

The completion of the transaction remains subject to the approval of the unit holders of Plains and Pacific as well as approvals of certain state utility commissions and the Investment Review Division of Industry Canada. Plains and Pacific have submitted the required filings and anticipate closing the transaction near the end of 2006.

The information provided in our June 12th conference call is available on our website and contains a significant amount of forward-looking data regarding our expectations for the impact of the merger. Likewise, the proxy statement, although not yet final, contains important information with respect to the merger.

Accordingly, given the unique rules regarding proxy solicitation, we respectfully request that you limit your questions to PAA standalone results and activities during today's question-and-answer session.

With that in mind, in addition to discussing our second quarter results, the purpose of today's call is to provide a status report on our non-merger related activities. Clearly, we believe that Plains All American's fundamental performance and its business outlook are sound on a standalone basis.

During today's call, we will provide you with information that supports our belief about the following five matters, which are listed on slide seven.

First, our pipeline and our GMTS segments are each performing well. And in conjuncture with continued favorable market conditions, we are generating meaningful cash flow in excess of our distributions, which cash is being used to fund a significant portion of our expansion capital program.

Second, our current expansion capital projects are on track, and we continue to expect them to perform as anticipated. In addition, we're already implementing -- assembling a solid inventory of capital projects to be implemented in 2007.

Third, the five acquisitions we completed in the second quarter have been substantially integrated and are performing consistently with or above our expectations, and we expect the two third quarter acquisitions to follow a similar path.

Fourth, using a combination of cash flow in excess of distributions and proactive equity and debt financing, we have adhered to our disciplined financial growth strategy and maintained a strong capital structure, excellent credit metrics, and a high level of liquidity.

And then, fifth, we are on track or ahead of schedule to achieve each of the goals we established at the beginning of 2006, including our distribution growth targets. These five aspects will be addressed throughout the remainder of the call, which will be divided into three segments.

First, Harry will report on second quarter operating results, review the major operational assumptions for our third quarter guidance, and then provide us a status report on internal growth projects and recent acquisitions. Second, Phil will discuss our capitalization, liquidity and recent financing activities and also review our updated financial guidance.

And then, lastly, I will wrap up the call with a few comments on our distribution outlook and coverage. At the conclusion of our prepared remarks, we will have a question-and-answer period. And a complete written transcript of prepared comments will be posted on our website, shortly after the completion of this call. In addition, our website will also provide you the option to download an audio version of the call.

With that, I'll turn the call over to Harry.

Thanks, Greg. Both of our segments exceeded the midpoint of our updated second quarter guidance. And as I review performance today, I will be comparing our actual results to the updated guidance we've provided on Form 8-K on June 12th 2006.

In our pipeline segment, adjusted segment profit was approximately $5.4 million above the midpoint of guidance, at $55.6 million. Our overall pipeline volumes for the quarter were about 5% above guidance, at just over 2 million barrels per day.

And as you could see on slide eight, actual second quarter volumes of some of major pipelines include 53,000 barrels a day on the All American system, 330,000 barrels per day on the Basin pipeline system, 178,000 barrels a day on the Capline system, and 73,000 barrels a day on the Manito system in Canada.

The increased volumes on the Basin system are primarily due to increased local movements in the Permian Basin and volumes committed under our three-year contract. The Capline volumes are slightly higher than our guidance and significantly higher than first quarter volumes, and the increased volumes on Capline are predominantly due to the multiyear contract we entered into at the new shipper, which became effect April 1st and extends through 2009.

The third quarter 2006 guidance that Phil will walk you through in a few minutes incorporates forecasted volumes on the All American system of approximately 51,000 barrels a day, the forecasted volumes on the Basin system of 340,000 barrels a day, 180,000 barrels a day at Capline, and 70,000 barrels a day on the Manito system.

As shown on slide nine, adjusted segment profit in our gathering, marketing, terminaling and storage segment was $71.4 million, roughly 2.3 million above the midpoint of our guidance range. On the same basis, our profit was approximately $1.06 per barrel. Lease gathered crude oil and LPG volumes of 699,000 barrels a day in this segment were slightly above our guidance.

In addition, we imported approximately 43,000 barrels a day of foreign crude to our Gulf Coast assets. Please note that the foreign volumes are now being included in our gathering, marketing, terminaling and storage volumes and, therefore, impact our profit per barrel metrics.

The strong performance in this segment was primarily due to favorable market conditions, successful execution of our risk management strategies during the quarter, and the fact that our recent acquisitions performed all stronger than forecasted in the quarter.

The third quarter market conditions are also favorable, although we don't think they would be as favorable as the conditions in the first and second quarters. In general, the market conditions incorporated into our forecast in the second half of the year are a little less favorable than we've experienced over the last 18 months.

Our guidance for the third quarter incorporates crude oil leased gathering volumes of approximately 675,000 barrels a day, LPG volumes of approximately 50,000 barrels a day, and our waterborne foreign volumes of 50,000 barrels a day. The increase in lease and LPG volumes are predominantly due to recent acquisition activity. Our adjusted segment profit per barrel, including the foreign volumes is forecasted to be 94 cents for the midpoint of our third quarter guidance.

Maintenance capital expenditure for the quarter came in at approximately $4.4 million and we're projecting maintenance capital expenditures for the year of approximately $20 million, which is slightly below our original projection. About $1 million of the reduction is related to lower-than expected cost in our integrity management program and about 2 million is associated with cost that are now expected to be incurred in 2007.

And as Greg, mentioned earlier, our 2006 expansion capital is on track, subject to typical mid-year type adjustments. As results of project division, modifications and cost adjustments we've increased our 2006 capital expansion program by about 10%, to $275 million. The major projects are listed on slide 10 along with corresponding costs expected to be incurred in 2006. And I'll provide a quick update on some of our larger projects and also on our gas storage investment.

Our Largest project is at St. James terminal, still expected to be completed in the first quarter 2007, however cost would be about 10% high than originally forecasted primarily due to higher costs and for material and supplies. I should add labor in there as well.

Our Kerrobert tankage is an expansion of 900,000 barrels of tankage that will increase our total storage capacity at that location to 1.8 million barrels. The construction of 300,000 barrels of storage capacity is completed in June, another 300,000 we placed in service in the fourth quarter 2006, and last 300,000 barrels expected to be in service during the third quarter of 2007.

While we are generally on schedule, note that approximately 12 million of cost additionally projected to be spent in 2006 would likely carry over into early 2007. All the new tankage has been designed to handle both heavy blend and condensate. The Kerrobert tankage is connected to our Manito and Cactus Lake systems and is also connected to the Enbridge mainline system.

At the Pine Prairie gas storage facility, which is owned through the PAA/Vulcan Gas Storage venture, we're drilling our first cavern well. The drilling is expected to be completed in September, which is behind our original schedule.

We also expect our leaching facilities to be completed in September as well. And we're still forecasting that 4 Bcf of capacity will be in service in mid-2007 with the remaining 20 Bcf of working capacity coming online in stages throughout 2008 and 2009.

At Bluewater, the connection with the recently acquired Kimball facility was completed in May. As we mentioned in our last quarterly conference call, PAA/Vulcan completed the acquisition of the Kimball facility in April of this year.

With the increase in winter, the Southern winter spreads with natural gas prices, and the new higher price contract that we've entered into, we currently believe that EBITDA for the combined assets -- combining Bluewater and Kimball -- will be around $24 billion to $25 billion a year or about 15% higher than our original expectations.

On the acquisition front, we've substantially completed integration of all five of the acquisitions discussed in our last quarterly conference call. We believe that the infrastructure we have in place to quickly and successfully integrate acquisitions provides us with a competitive advantage.

Since our last quarterly conference call, we have announced the transaction with Pacific Energy and have also announced two additional acquisitions, one of which is closed and the other is pending. The aggregate cost for these two new acquisitions is approximately $195 million.

The first of these two transactions was the acquisition of three Gulf Coast crude oil pipeline systems from British Petroleum, BP. The majority of the cash flow associated with these assets is now subject to long-term leases and is expected to provide stable, fee-based cash flow. We closed on two of these systems effective June 30th, and closed on a third pipeline system last week.

The second transaction is a pending transaction with Chevron of several refined products pipeline systems. The pipeline systems are located in West Texas and New Mexico and provide tariff-based revenue. The largest of the systems is a 257-mile system that transports approximately 28,000 barrels a day of refined product from El Paso to Albuquerque.

These assets provide an excellent initial entry point into the refined products business. Much like the natural gas storage business, we believe that refined products business is complementary to our existing business model and it provides significant long-term growth opportunities. We expect this transaction to close in August.

We're very, very active in our acquisition efforts this year. Excluding Pacific thus far, we have announced or closed seven strategic, accretive and complementary acquisitions of approximately $572 million, giving effect to projected synergies, additional capital investment, modifications of operating practices and inventory reduction.

We estimate that the aggregate investment to projected EBITDA for these acquisitions will be in the range of 8 time. Although there are likely additional opportunities to enhance the value of these assets, we believe that the current multiple range is very attractive, given that the majority of the cash flow associated with these assets is derived from tariff or fees-based activities.

And with that, I'll turn the call over to I will now turn the call over to Phil.

Thanks, Harry, and good morning. During my portion of the call, I will review our capitalization liquidity at the end of the second quarter, discuss recent financing activities, and then walk through our updated financial guidance for the rest of this year.

As summarized on slide 12, we maintained a strong credit profile and capital structure during the second quarter despite undertaking over $450 million of acquisitions. Please note that the balance sheet of June 30th doesn't reflect the net proceeds of $163 million from the third quarter direct equity placement, and it also didn't include approximately $20 million of the Chevron and BP acquisitions that Harry just spoke of.

At June 30th, PAA's long-term debt outstanding was approximately 1.26 billion, while book equity was 1.53 billion. As a result, our long-term debt to total cap ratio was approximately 45%. Our second quarter adjusted EBITDA to interest coverage ratio was approximately 7.1 times, and our long-term debt to second quarter annualized adjusted EBITDA was approximately 2.4 times. These ratios did not change substantially after adjusting for the equity placement and the two acquisitions that I just mentioned earlier.

You should keep in mind that the foregoing metrics exclude our short term debt and contango-related interest cost. Debt classified as short term primarily reflects borrowings under our contango facility and revolver for our hedge crude oil and LPG, as well as NYMEX and IPE margin requirements. At June 30, the balance in short term debt was approximately 1.19 billion, an increase from 876 million at the end of the first quarter. This increase reflects higher volumes and an increase in the outright price of crude oil.

You've seen a few research reports that include our short terms and credit metrics that we view as associated with the long-term capital structure. Given that this short term debt is essentially self liquidating and secured more than one to one with hedge crude oil, we think excluding the debt from our credit metrics is the appropriate treatment.

Nonetheless, I would note that your should properly match the credit metrics with the capitalization that includes the short term debt. You will need to add the quarterly EBITDA, the amount of contango interest reflected in cost of sales and annualize that impact. This adjustment will enable you to properly match the increased cash flow level with the increased overall debt level.

For the second quarter approximately 13.3 million of contango interest was included in cost of sales. Adding that amount to our adjusted EBITDA of 128.2 million results in a modified adjusted EBITDA of 141.5 million and an annualized adjusted EBITDA of 566 million.

Comparing this annualized EBITDA measure into the total debt of 2.44 billion generates a debt to EBITDA metric of approximately 4.3 times, which we believe is still a strong metric considering that our hedged inventory at June 30th represented approximately 50% of the total debt balance.

There are a few financing transaction that I wanted to comment, some of which just have occurred since the end of the second quarter. Just yesterday we completed an extension and $600 million increase in our committed revolving credit facility, thereby increasing our liquidity and extending our average maturities. This $1.6 billion commitment matures July 2011 and has an accordion feature that enables us to increase the size to $2 billion, and that's subject to receive a lender commitments for the incremental portion.

Also yesterday we entered into a committed $1 billion acquisition bridge facility to finance the cash portion of the Pacific acquisition. The new facility will enable us to maintain a high level of liquidity prior to refinancing in the debt and equity markets. The initial funding in the facility will occur when the PPX merger closes.

The $1 billion bridge facility is a 364-day facility, with a one-year term out provision. The stated term provides us with flexibility that we will monitor the debt markets with the intent of refinancing sooner rather than later. Our borrowing costs and covenant structure under the bridge facility are substantially the same as under our revolver facility.

In May, we completed a $250 million placement of 6.7% senior notes due 2036. As a result of that transaction, our long-term debt at June 30th had an average life of 11.5 years and 96% of the amount had a fixed rate of interest. On July 20th, we announced the sale of 3.7 million common units for net proceeds of 163 million in a direct placement to a group of institutional and private investors.

Since the beginning of the year, we raised an aggregate of $315 million of equity. The ability to consistently and efficiently access capital in a timely manner has been and will continue to be an integral part of our growth strategy. We are proud of our track record of growing the partnerships business and distributions through internal growth projects and acquisitions, while maintaining conservative capitalization and financing discipline.

As shown on slide 13, we funded over 60% of our acquisitions in the last five years with equity or excess cash flow. For reference, we have raised over 1.2 billion of equity capital over this time, while increasing the distributions paid per unit by approximately 45%.

Despite a projected record year of internal growth projects and acquisition activity, we are ahead of our objective to fund at least 50% of our capital requirements with the combination of either equity or excess cash flow. In addition we have taken numerous proactive steps to mitigate financing risk and increase our liquidity, and therefore believe the partnership is well-positioned for future growth.

Given the significant amount of capital and acquisition activity, I want to briefly summarize our 2006 capital expenditures to-date and reconcile the equity in excess cash flow used to fund these requirements. In addition to the 572 million of acquisitions this year, excluding the Pacific transaction, through June 30th, we have expended 104 million on the expansion capital projects.

During the second half of 2006, we anticipate spending approximately 171 million of expansion CapEx. Accordingly our total growth capital expenditures this year are currently expected to aggregate approximately at 847 million excluding any additional acquisitions as noted excluding specifics.

On the financing side of the equation and consistent with our financial growth strategy, we target funding at least 50% of acquisition expansion capital expenditures with excess cash flow and equity.

We enter the year with approximately $95 million of excess equity capital that we raised in late 2005. Combined with approximately 315 million of equity capital rates this year, approximately 72 million of cash flow in excess of partnership distribution in the first half of this year-over-year and then approximately 50 million is in the midpoint of projected cash flow in excess to partnership distributions in the second half of the year.

We will have raised a generated approximately 530 million of equity or excess cash flow, which is available to meet our targeted objectives. As a result we have approximately $108 million excess over our self-imposed equity requirements. This excess is available to support our merchant activities in contango market, 2007 expansion capital activities, and future acquisitions as well as the pending transaction with Pacific Energy. This calculation is recapped on slide 14.

The execution of our business model enables us to consistently produce a baseline cash flow in all types of crude oil markets, and in certain types of markets capture upside profit. These upside profits when coupled with our disciplined to pre fund the equity component of certain acquisition allows us to stay ahead of our equity funding requirements. Importantly, the sales mitigate equity financing risk associated with significant acquisition, internal growth activity and avoids what could be perceived as an equity overhang in our units.

Let me now shift to a discussion of partnership's financial guidance. Our guidance is based on reasonable expectations of volumes and expense levels, as well as our judgments and assumptions about potential associated with our business development activities, where the outcome is less than certain at this point. That includes estimated contributions from certain of our recent acquisitions as well.

Please note that our guidance does not take into account any contributions from Pacific energy. In addition, please keep in mind that the guidance we're providing excludes selected items that we believe comparability between the periods.

Our detailed guidance for the third and fourth quarters and the full year was furnished to be at an 8 K this morning, so I am just going to touch on the high points and they are summarized on slide 15.

For the third quarter of this year we guided to an adjusted EBITDA range of 150 million of 125 million close to a midpoint of 120 million, and is substantially the same as the revised guidance for the adjusted EBITDA for the second quarter this year. Although we were received contributions from acquisitions close in the second and third quarters, we are forecasting slightly less favorable market conditions than we experienced in the first and second quarter as Harry noted earlier in the call.

For interest expense purposes, we anticipate an average long-term debt balance of approximately 1.2 billion, a result of interest expense of approximately $19.6 million to $20.4 million. As a reminder, interest on the contango related borrowing has excluded in the cost of sales, again as we view the interest on the borrowings as part of the inventory costs.

Depreciation and amortization is projected to be between 24.4 million and 24.8 million. The need estimates results in adjusted note income -- net income excuse me of approximately $70 million to 81 million that equates to $0.74 to $0.87 per diluted unit.

For the full year of 2006, we increased our guidance based on second quarter performance, our expectation and market conditions for the rest of the year, and inclusion of the recently announced acquisitions.

For the full year we now expect adjusted EBITDA to be between $464 million and $484. The midpoint of 474 million is approximately $108 million higher than the original midpoint of our annual guidance that was provided in February of this year.

Approximately $38 million of that increase is attributable to partial year contributions from predominately fee-based acquisitions. I note that these acquisitions are predominantly fee-based in nature, because they create a stronger and more resilience base cash flow stream.

Interest expense is expected to range from approximately 72 million to 74 million, and as based on weighted average debt balance for the remainder of this year of approximately $1.3 billion. The fully loaded weighted average interest rate of approximately 6.2%. This average interest rate includes revolver commitment fees, amortization of long-term debt premiums and discounts and deferred amounts associated with terminated interest-rate hedges.

Approximately 1.3 million of 2006 projected interest expense is expected to be non-cash, as it relates to amortization of deferred amount associate with terminated interest rate hedges. Based on these estimates, we forecast adjusted net income approximately 296 million to 318 million for the full year and that's 329 to 357 per diluted unit.

You should note that while total net income for the Partnership is not impacted by change in our annualized cash distribution level a $0.05 increased in annualized distribution per unit does equate to the $0.05 annualized decreased in net income for LP unit excluding the impact of EITF 0306.

And finally consistent with FAS practice we didn't attempt to forecast any potential impacts related to SFAS 133 because we have no way to control our forecast crude oil prices on the last day of each quarterly period. Accordingly, the guidance are provided for the third quarter and year excluded any potential gains or losses associated with this accounting statement. For more detail on these projections as well as other assumptions we would once again direct you to the 8-K that we furnished this morning.

And finally, I have two other accounting related issues to mention before turning the call back over to Greg.

First, as we have discussed in our first quarter earnings call we adopted EITF 0413 that was affected April 1 that causes inventory purchase sales and by sales transaction with the same counter party to be treated as exchanges and netting for financial statement presentation. This lowered our revenues for financial reporting purposes by about 6.5 billion, but it had no impact at all on our overall margins and profits.

Finally, over the last several years we have expand and grown our gathering marketing, terminalling and storage segment, which is supported by sizable portfolio, hard assets and landfill. During this time we've also increased the amount of fee-based activities that are included in the same segment.

We currently estimate that approximately 25% of adjusted EBITDA from our gathering, marketing, terminalling, and stored segment is derived from fee-based activities. I should point that this calculation includes as fee-based activities only the portion of cash flow from proprietary tank strategies that could be achieved by leasing the tanks to third parties. On a combine basis including both segments we estimate that approximately 58% of adjusted EBITDA is comprised of care and fee-based activities.

Prior to pursuing the Pacific transaction we were in the process of evaluating alternative disclosure metrics to enable you to better monitor this aspect of our operations. As noted on the June 12 conference call, Pacific derives approximately 90% of its adjusted EBITDA from tariff and fee-based activities. We are now in the process of determining the appropriate segment-wide now and reporting metrics we will adopt following completion the Pacific merger.

As we proceed over the next several months, we will evaluate the best way to report our segment activities. But our current estimate is that on a combined basis with Pacific, tariff and fee-based activities will represent approximately 67% of our adjusted EBITDA.

With that, I am now going to turn the call back over to Greg.

Thanks, Phil. The second quarter was clearly active and productive quarter for the partnership. We were able to achieve strong operating and financial results and make significant progress on our internal growth projects. On the acquisition front, we substantially integrated five acquisitions, close to six and announced a seventh acquisition and also entered into an agreement to acquire Pacific Energy.

Although our acquisition activity has recently garnered the majority of attention, our business model has continued to generate a stable and expanding foundation of cash flow while still capturing significant upside profits. These profits not only helped to bolster our distribution coverage but also the fund the sizable portion of our expansion capital program, which reduces our reliance on outside capital sources and minimizes dilution.

The execution and expansion of our internal growth program in turn generates continued improvement in our operating and financial results and we believe provides an extremely visible distribution profile over the next several years. Therefore, any acquisitions we make are generally incremental to an already growing baseline profit level and extend an enhanced visibility of our distribution growth profile.

On the topic of distribution growth, we recently announced an increase in our distribution to 72.5 cents per unit or approximately $2.90 on an annualized basis. This distribution, which is payable on August 14th, represents an 11.5% increase over the August 2005 distribution and marks our ninth consecutive quarterly increase.

As shown on slide 16, we have consistently generated attractive annual distribution growth rates over a multi-year time horizons and have targeted to continue to generate annual distribution growth of 79%, as announced in our June 12 conference call, even after the intended acquisition, annualized distribution increased $3.20 following the merger with Pacific.

We believe our game plan to achieve our targeted annual distribution growth path over the next several years are proven business model and maintaining this track record of executing and delivery on promises makes a very attractive risk-reward profile for PAA unit holders. We thank you for your continued support of partnership and look forward to updating you on our progress on our next conference call.

I'd also like to quickly update on the status of our analyst meeting, which was originally scheduled for June 6 in Houston. In a press release on May 25th, we announced that we plan to reschedule the events on a day sometime in September. Due to the Pacific transaction, we have decided that it will be more beneficial to hold the meeting after the transaction is closed. We apologize for any inconvenience and appreciate your patience while we move the dates around.

We will keep you posted on the specific date of this rescheduled meeting. If you have any questions, please do not hesitate to call 713-646-4100 and ask for Brad Thielemann or Carolyn Tice. That wraps up items on our agenda.

We would like to thank you all for your participation in today's call. For those who joined us late, a complete written transcript of prepared comments of this call will be posted on our web-site at www.paalp.com. Very shortly after the call as well as the option to download an MP3 file.

Operator, at this time, would you open the call up for questions?

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session.

[OPERATOR INSTRUCTIONS].

Our first question comes from Yves Siegel with Wachovia. Please state your question.

Thanks and good morning, everybody. Two questions. One, Greg, is it possible to try to isolate what you think base EBITDA is or conversely, how much of pop did you get from the favorable business environment? And so how do you think about that going forward with excess cash flow?

It just seems with all the information that Phil gave also, when you start quoting percentages of EBITDA that are fee-based, I am just wondering what you sort of consider is a base case EBITDA going forward?

And the second question is, as you make all these acquisitions, is there a challenge to make sure that you are in compliance with SOX? How does that process work? Thank you.

Yes. On the first issue, EBIT is a challenge. I mean we position our asset base to generate what I call a stable baseline of cash flow in almost any market. Now, there are certain assets that generate cash flow in one type of market, and yet, they may not generate any cash flow in a different type of market, but other parts of our assets and the way that we manage our risk manager strategy is kicking on to complement that.

I would say the best way to kind of get a feel for what we believe the baseline cash flow is as we provide a guidance -- preliminary guidance for 2007, which we, in that guidance, express it saying this is based upon a less robust market for 2007 than what we have been experiencing.

And in that, we -- you know, the midpoint of that guidance was around 500 million. That also includes obviously the pick-up of some of the capital development projects that are in process in 2006 that will come on stream in 2007. So as you apply those percentages, that is what I would probably use as a baseline.

Does that mean there is not any downside below 500? No. There is some there, but as we filter out some of the very robust market conditions that would cause that number to be higher, if we forecast a continuation of these conditions. Harry mentioned in his comments that we did not forecast as robust numbers in the second half as what we have experienced over the last 18 months.

We've done that in several quarters. And in each quarter, we have been wrong. But our belief is we are better off telling you what we think we can do and what's most closely akin to whatever you call a normal market, and then come in above those levels, than having you disappointed by saying we have projects we cannot control, which is the market conditions and then have, not because of our fault, but because of market conditions coming in below it. So it's a happy experience when we come in above as opposed to a sad experience.

As far as the SOX 404, I think one of the things we wanted to do on this call is that to let you know as accurately as we have been. I think we have now closed over 40 different acquisitions over the last five years. I would tell you early in the process, we were developing our skills and our processes to be able to do that. Today, we think we have got it hone down very well. That doesn't mean there is no room for improvement. There always is.

But I think -- you know, we have already put to bed the first five acquisitions that we have done out of seven. The other two are going to be pretty much straight forward. Most of these have been fee-based and so really integrate very easily and so we think we've got it down.

As far as the SOX side of it, 404, a tremendous amount of focus was placed on that several years ago. If we're going to continue to be acquisitive, how do we make sure that we're able to keep up with compliance with our internal controls and we adopted our process as we added some overhead and we also reached out to outsourcing parties that we've used in the past to help us with that overload that typically is associated with the initial integration but then goes away once you've integrated it.

So I would say we think of it, we definitely feel like we have got a competitive advantage in the market when it makes that reap all the value that today it seems like nobody worried about that. But in the future, when markets aren't quite as a liberal with the capital we think that those competitive advantages will actually cause us to distinguish ourselves even more in that type of market.

Thank you.

[OPERATOR INSTRUCTIONS]

Our next question comes from Ross Payne from Wachovia. Please put your question.

How are you doing guys? Hey Greg I thought it might be helpful if you could just kind of talk about the general state of gathering margins and also touch on what you are seeing in the contango market and opportunities over the next couple of quarters?

Yes, hi Ross, this is Harry. Gathering margins, we have combined our gathering marketing and terminalling storage business as one reporting unit because it is the way we sort of combine our strategies. We use tankage in conjunction with our gathering and marketing activities.

And it is really hard to come in and say, gosh, we make this much a barrel gathering and this much a barrel terminalling or so in a barrel because they're so interrelated. We take strategies and commit tankage to it to support our gathering business. I think in total, our margins were $1.06 a barrel and I think those have been pretty stable over the last few quarters.

Our margins have been reflective of a double market. Once the market goes into contango, gathering margins typically get hit, storage margins do better and then they sort of flatten out as the market stays in either contango or back gradation, back related markets. So I don't know how to answer the question other than the in-place we have out there that combines the two segments of the component of our business.

I would say one of the things that certainly has contributed to for the last really six quarters, which is an 18 month period, is that there has been a fair amount of volatility. We have seen the market at the end of June or toward the end of June, first part of July, actually go from the contango into flat if not slight back gradation for a little bit and then widen back out rather rapidly.

We don't always get the full benefit of that. I mean one of the presumptions out there is that we have our tanks empty until it actually hits the peak on the contango market and then we fell above, but that doesn't really work out to be the case because we're managing for the long term. So as we have the strategies on there actually, in many cases many months in the future.

What Harry referred to is we do have a combination of both tankage and contracts at the leases that allow us to balance those out. And those really help to smooth out the overall performance because when we make wider margins in one area, the other parts are getting hit and we have made sure we balanced our asset base.

What I can tell you is that as long as the market stays in a tight supply-demand constraint and it is also volatile we are well-positioned to reap a lot of benefits and hopefully the next 18 months will look as good as the last 18 months. But our forecast that we've given you for 2007, don't assume that, that's going to be the case.

And so if it does happen there is upside to our numbers. If we ended up -- the worst kind of market for us is basically a flat kind of lazy market that really does not know which way to go. If you look at it historically you do a run cost in occasion to that but generally they don't last anything more than a quarter to six months.

The last time, we had that type of market Ross was if I recall was at the very end of 2001, first part of 2002. And that was -- you could attribute a lot of reasons to that but I think there was just a lack of decisiveness worldwide as to what was going to happen following 9/11. And so nobody knew whether the prices were going to go up, was it going to slow destroy economies, was it going to stimulate economies.

But and that lasted I think it was for about six months. So and then if you recall, gosh I think it was the end of '03, we kind of got on the soapbox and talked about what we were positioning our business model and our asset base for, and it's exactly the kind of market that we're in right now.

And forecasted then and we thought that once it showed up, it could stay for quite a while and again we're optimistic that it has the potential but that we're just not so optimistic that we want to cause you to alarm and call that base cash flow.

Okay. That's fine. And Greg, I'm just kind of sensing that a couple of quarters ago you were getting abnormally large gathering margins at the same time you were in a nice contango market. And it sounds like things may have gone back to a little bit more of a normalized level this quarter. Is that fair to say or not?

I don't know. I think what has happened is, is we've continued to buttress up our activities with additional assets, we bought a lot of assets on strength on stream, it's taken out some of the potential volatility that could've gone the other direction. It still requires a close monitoring of the markets by our guys to put on the right strategies, but to complement market conditions.

I would say probably what has happened is we are underpinning more and more with assets that are designed to service the needs of the market and for that we are able to extract a fairly stable level of returns on those assets because it's not simply a truck gathering barrels, but we've got pipelines, we've got tanks and we've got various infrastructure that allows us to get that to the best market.

Yeah Ross I think what you're referring to is actually more like 18 months ago when the market first went into contango, and that's, like Greg said, typically that transition is the worst period of time for our gathering and marketing business. And then once it settled out, we actually had lower margins when they occurred on gathering and marketing business. And once it settles out, our margins returned to more normalized levels. It's been in that environment for several quarters now.

Okay, all right. That is really what I was asking. You got very good performance under more normalized environment today, so that looks great. All right, thanks, guys.

Thanks Ross.

Ladies and gentleman, there are no further questions at this time. I will now turn the conference back over to your host to conclude.

I just want to thank everybody for their continued support and participation on today's call and we look forward to giving you updates at the end of the third quarter. Thank you.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.