Plains All American Pipeline LP (PAA) 2006 Q4 法說會逐字稿

Welcome to Plains All American Pipeline's fourth-quarter and year-end 2006 results conference call. (OPERATOR INSTRUCTIONS). During today's call, the participants will provide forward-looking comments on the Partnership's outlook, as well as review the results of the prior period. Accordingly in doing so, they will use words such as believe, estimate, expect, anticipate, etc. The Partnership intends to avail itself of Safe Harbor provisions that encourage companies to provide this information 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 and Exchange Commission.

In addition, the Partnership encourages you to visit its website at www.paalp.com. In particular, the section entitled non-GAAP reconciliation, which present 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 those non-GAAP financial measures to the most correctly comparable GAAP financial measures and includes a table of selected items that impact comparability with respect to the Partnership's reported financial information.

Any reference today during today's call to 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's President and COO, and Phil Kramer, Plains All American's Executive Vice President and CFO.

I would now like to turn the conference over to Mr. Greg Armstrong. Thank you.

Thank you and welcome to everyone. As a reminder, the slide presentation accompanying this call is available on our website at www.paalp.com.

Before I begin, I want to extend a special welcome this morning to our new unitholders who joined us as a result of the Pacific merger. In addition to holding quarterly conference calls, we also furnish detailed financial and operating guidance each quarter on Form 8-K. You can access this information, as well as our conference call scripts, investor presentations and non-GAAP reconciliations on our website. We're pleased to have you as new investors in PAA, and we pledge to work hard to earn your continued support.

During the course of today's call, we will be covering information that supports five major points which are listed on slide three. First, PAA delivered outstanding operating and financial performance in all four quarters of 2006 and achieved or exceeded all five goals that we set for the year. Second, the integration of the Pacific Energy Partners and the eight other acquisitions we completed in 2006 is on track, and all acquisitions are performing in line with expectations. Third, we believe our base business activities and extensive inventory of growth projects position PAA to deliver solid operating and financial results for 2007 in the next several years, achieve our target of increasing annual distributions paid in 2007 by at least 14% over 2006 distributions, and finally achieve our targeted average annual distribution growth of 7 to 9% for the next several years.

Fourth, PAA ended 2006 with an extremely strong balance sheet and excellent liquidity, and the Partnership is well-positioned to finance PAA's organic growth projects, as well as future acquisitions. And then fifth and finally for today's points, PAA has developed a diversified business platform that not only includes accrual activities but also refined products, LPG and natural gas storage activities which we believe provides an attractive balance and reduces our risk profile.

Let me briefly discuss the results we released yesterday afternoon. During the fourth quarter of 2006, Plains All American once again delivered strong financial and operating results. As illustrated on slide four, we reported EBITDA of $111.5 million and net income of $46 million or $0.36 per diluted unit. Excluding these selected items impacting comparability, our adjusted fourth-quarter EBITDA is $146.3 million, and adjusted net income was $80.8 million or $0.72 per unit. These adjusted results represent increases of 42% and 29% and a decrease of 4% respectively over the corresponding metrics in last year's fourth quarter. The largest item impacting comparability was a $19.2 million SFAS 133 loss and a large part of which offset contracts associated with the 17.9 million SFAS 133 gain we reported last quarter, which they have since settled.

The other selected item was the accrual associated with the long-term incentive plan. These two items together, which were excluded from our fourth-quarter guidance, negatively affected results by $34.8 million.

On November 2, prior to closing the Pacific merger, we provided fourth-quarter guidance both with and without the anticipated impact of the Pacific merger. As shown on slide five, we estimated Pacific would contribute $18.5 million in adjusted EBITDA to PAA's midpoint guidance of $120 million, yielding total adjusted EBITDA guidance for the Partnership of $138.5 million. Though there were ups and downs in various aspects of their operations, Pacific's adjusted EBITDA contribution for the last 46 days of the fourth quarter totaled approximately $18.7 million, which compares favorably to guidance. Excluding Pacific, PAA's base adjusted EBITDA was $127.6 million, which exceeded the high-end of guidance. The combined total adjusted EBITDA for the Partnership totaled $146.3 million, which also exceeded the high-end of guidance. And, as shown on slide six, this marks the 20th consecutive quarter that PAA has delivered solid performance relative to its financial guidance.

If you turn to slide seven, for the full year, we reported EBITDA, net income and net income per diluted unit of $470 million, $285.1 million, and $2.88 per unit respectively, which represents increases of 30%, 31% and 6% respectively over the 2005 levels. Excluding the selected items impacting comparability, which in the aggregate negatively affected results by $40.8 million, adjusted EBITDA was $511 million, and adjusted net income was $325.9 million or $3.50 per diluted unit, and these adjusted results represent increases of 25%, 23% and 1% respectively over the corresponding 2005 metrics.

In comparing our results between the detailed guidance and our actual results, because our weighted average units outstanding included approximately the impact of $22 million in units we issued in connection with the Pacific transaction for 46 days and the issuance of 6.2 billion units from the December direct unit placement for approximately 15 days, our weighted average units outstanding increased about 3.1 million for the quarter and 15.5 million units for the year. The net effect of this adjustment impacted distributable cash flow by about $0.05 per unit. I would also point out that while we exclude the LTIP charges from our comparison of operating results, the dilutive impact to the units is included in the analysis, and accordingly, if we did not exclude them, it would result in double counting their impact.

The remainder of today's call will be divided into three segments. First, Harry will review fourth-quarter operating results and address major operational assumptions for the first-quarter guidance. He will also provide an overview of the PPX integration and execution activities and discuss the status of our 2006 expansion capital projects, our capital plans for 2007 and our recent acquisition activities. Next, Phil will discuss our capitalization liquidity and recent financing activities and provide guidance for the first quarter and full year of 2007. And then finally, at the end of the call, I will touch on a few forward-looking points, including our execution challenges and specific goals for 2007, and then we will open the call up for questions.

Shortly after completion of this call, we will post to our website a complete written transcript of the prepared comments, along with an audio version of the call. And with that, I will turn the call over to Harry.

Thanks, Greg. Before I discuss our segment results, I want to point out that effective in the fourth quarter of 2006 we adjusted our operating -- our reporting from two to three segments. Due to our growth, especially in the facilities portion of our business and most notably in conjunction with the Pacific acquisition, we have revised the manner in which we internally evaluate our segment performance and decide how to allocate resources to our segments.

We have also recast 2004, 2005 and 2006 results into this resegment format in our 10-K, which will be filed in the next week. This new format should help you better distinguish between our fee-based and non fee-based activities, particularly those relating to our facilities, which were previously included in our former GMTS.

As discussed in our last call, the three segments include first, our transportation segment, which includes our tariff and fee-based businesses relating to our pipeline transportation activities, trucking services provided to third parties and the equity earnings for our investments in the Butte and Frontier pipeline entities and Settoon Towing. Secondly, our facilities, which includes the fee-based portion from our storage, fractionation and processing activities and equity earnings from our investment in PAA bulk and gas storage.

And then third, marketing, which includes all our merchant activities and our crude oil gathering and LPG businesses and the merchant activities and the risk management strategies associated or related to our storage assets.

Turning to the top of slide eight, it shows our fourth-quarter results in the new three segment format. For purposes of comparing our fourth-quarter results to our November 2 guidance that was given prior to our change to the three segment reporting, the bottom of the slide shows adjusted profit for our former pipeline and GMTS activities plus Pacific's results. Excluding the Pacific assets, pipeline volumes for the quarter were approximately 2.2 million barrels per day. We are basically equal with the midpoint of our guidance. Adjusted profit to our pipeline activities was $50.8 million or $0.25 a barrel, which was $5.4 million lower than the midpoint of our guidance range on an adjusted basis.

The negative variance was due to a combination of slightly lower than forecasted revenue and slightly higher than forecasted operating and net SG&A expenses. Revenues were approximately $1.5 million lower, and that is about a 1.4% negative variance and primarily due to pipeline losses being higher than forecasted. Allocated operating expenses were $1.7 million higher than forecasted, and that is a 3.7% negative variance. And then SG&A expenses were about $2.2 million higher than forecasted, of which approximately $600,000 is offset in our GMTS activities. Adjusted results from our GMTS activities were $72.1 million or $0.93 per barrel, which is $11.4 million higher than the midpoint of our guidance on an adjusted basis. Our GMTS volumes of 841,000 barrels per day also exceeded the 790,000 barrels per day midpoint of our guidance.

The other performance in our GMTS activity is largely associated with the performance of our risk management strategies and to a lesser extent the higher than forecasted volumes previously mentioned and the previously mentioned SG&A allocation. Maintenance capital expenditures for 2006 were $28.2 million or $5.2 million higher than the $23 million included in our original guidance for 2006. The increase is primarily due to our 2006 acquisition and increased focus on non-DOT regulated integrity management programs. We estimate 2007 maintenance capital of approximately $45 million.

In a moment, Phil will discuss our 2007 guidance. This guidance assumes volumes from the transportation segment of approximately 2.7 million barrels per day, composed in part of the following estimated volumes. 48,000 barrels a day on the All-American system, 335,000 barrels a day on the Basin pipeline system, 190,000 barrels per day for cap lines, 145,000 barrels per date on a combined line 2000 and line 63 volumes to Los Angeles, 130,000 barrels a day on our Salt Lake City core system and 75,000 barrels per day for the [Mantu] system.

Full-year 2007 guidance for our facilities segment is based on revenues generated of 35.6 million barrels per month of crude oil, refined product and LPG storage, 13.4 Bcf per month of natural gas storage, and 17,000 barrels per day of LPG processing throughput less associated fees. Full-year 2007 guidance for our marketing segment incorporates lease gathering volumes of approximately 670,000 barrels per day, LPG sales of 110,000 barrels per day and 90,000 barrels per day of foreign volumes for total estimated volumes of 870,000 barrels per day.

Our first-quarter 2007 guidance reflects unexpected continuation of the current contango market favorable market conditions relative to our asset base and business model. For the remaining three quarters of 2007, we assume a moderately favorable market structure.

I should note that because of the interrelated nature of our partnership segments, certain transactions will occur between segments requiring the use of intercompany charges for services provided, including [poster] tariffs, lease fees that we believe are indicative of the market price. For further discussion of intercompany charges, please reference our 2006 10-K which we will file next week.

With respect to the Pacific transaction on slide nine, I have listed our four major milestones to be completed, and they include, first, converting the business controls from a regional profit center based structure into PAA's functional operating structure. We substantially completed this step. And number two, to complete the integration of personnel information systems and businesses by the early second quarter of 2007. We have completed a substantial amount of the integration and are on track to complete the remaining tasks by early next quarter.

And third, to realize $30 million of targeted synergies in 2007. We are on track to achieve the synergies. However, since many of these synergies will be realized through absorbing PPX's field and backoffice operations into our existing infrastructure, it will be increasingly difficult to separately track specific synergies throughout the year. I point out that these synergies are included in our 2007 (indiscernible) guidance.

And then fourth, incorporate the former PPX expansion capital projects into the execution of PAA's capital program. We have included these projects into the capital programs I will discuss today, and we will continue to give status updates throughout the year.

In December we announced our 2007 expansion capital program of $500 million, which is shown on slide 10. That includes carryover projects from 2006, including St. James Phase I and Phase II projects, Cushing Phase VI and the [Crawford] terminal projects. We're proceeding according to plan on all these projects.

In December we also announced plans to construct a new 2.6 million barrel terminal and storage facility of Patoka, Illinois. Patoka is strategically located at the north end of our Capline system, and we will be capable of handling domestic grades of crude oil, as well as foreign crude oil volumes from Capline and southbound Canadian barrels, making an important regional sourcing point for refineries.

Similar to the Cushing and St. James facilities, Patoka will have the ability to be expanded should market conditions warrant. The total cost for the project is estimated to be approximately $77 million. Subject to timing of the permitting process, we anticipate investing approximately half the total capital in 2007 and the balance in 2008. We expect the facility will become operational during the second half of 2008.

As mentioned a few minutes ago, our 2007 capital program includes a number of projects that we acquired in the Pacific transaction. Since some of these may be new to certain of our unitholders, I wanted to spend a few minutes to provide you with some background and a status report on some of the major projects.

As shown on slide seven, the first project, the Salt Lake City pipeline, begins at the terminus of the Frontier pipeline system near Evanston, Wyoming, and it's 95 miles to Salt Lake City. It is a 16-inch pipeline that will provide an estimated 120,000 barrels per day of crude oil capacity to meet increased demand oil in the Salt Lake City area. The project is supported by 10-year commitments with four of the five refiners in the Salt Lake City market and will be capable of transporting multiple grades of crude oil in segregated batches.

Earlier this week we signed a letter of intent to sell a 25% interest in this line to Holly Energy Partners, an affiliate of the fifth Salt Lake City area refinery. As part of the anticipated agreement, Holly refining and marketing will enter into a 10-year transportation agreement on terms consistent with the four previously committed refineries. We believe partnering with Holly will maximize the utilization line and improve the project's economics. We anticipate completing the pipeline in early 2008. PAA's total cost of the project is expected to be $75 million, with approximately $55 million being spent in 2007.

Moving on to the second project, the Cheyenne pipeline, consistent with 24-inch pipeline from Guernsey to Fort Laramie, Wyoming, and a 16-inch pipeline from Fort Laramie to Cheyenne, Wyoming. Capacity of this new system will be 55,000 barrels per day. The project is on schedule for completion by the end of the second quarter of this year. The project is supported by a 10-year firm commitment to ship approximately 35,000 barrels per day. Total cost for the project is expected to be approximately $59 million with the remaining $34 million to be invested this year.

Moving onto slide 12, we are proceeding with an 850,000 barrel expansion project at our Martinez terminal in California. The project is supported by executed lease agreements for all of this capacity. Total cost of the project is expected to be $34 billion, the majority of which will be spent in 2007. The project is on schedule for completion by end of the year.

We're currently permitting our fourth major project, a 1 million barrel expansion of the Paulsboro terminal in New Jersey. Total cost of the project is expected to be $31 million with $20 million to be invested in 2007, and that is subject to obtaining our permits. We anticipate completing the project in the second half of 2008.

[Plaxley] is seen on slide 13. Pier 400 is a longer-term project that has been working its way through the regulatory approval process since 2003. The total project costs are expected to be about $360 million, and the project is supported by existing commitments and letters of intent, most of which provide for some cost protection in the event capital costs increase over time. We believe that the fundamentals of Pier 400 are very solid and represent the key element of the California energy solution. As a result, we believe it is more of a question of when it will occur and not if it will occur, and we will continue to diligently pursue obtaining regulatory approval and implementing the project. The challenge today is predicting the time.

When we announced our agreement to acquire Pacific in June of 2006, we targeted completing Pier 400 construction in 2009, and that was about a year later than Pacific's targeted time of 2008.

The next critical step requires the release of a draft environment impact statement by the Port of Los Angeles, which is part of the process of which we are not in control. We're well represented in our effort with respect to local legal, political and process advisors, and we believe that we have the support of the Port Authorities. We also understand the California processes are unique, lengthy and not predictable. As a result, our capital plan for 2007 only includes approximately $10 million of capital to continue to pursue the project. If approvals are received in 2007, we would enthusiastically adjust our capital plan for 2007 upwards and believe it is possible that construction could be completed in 2009. But realistically we expect that will likely occur later.

Importantly, you should note that we have identified a number of other projects and synergy opportunities since we have closed the Pacific transaction, and any delay also defers the occurrence of capital cost. As a result of these factors, we do not expect a Pier 400 delay will have any meaningful adverse effect on our expected contribution to distributable cash flow from the Pacific acquisition for 2007, 2008, 2009 or even 2010.

In summary, we have made great progress with Pacific integration. As with other major acquisitions, we will continue to provide you with updates on integrations, synergies and internal growth projects over the next few quarters so that you may monitor our progress.

Before moving on to acquisitions, I would also like to comment on the Pine Prairie gas storage project. This is another important project under development. But since we account for our investments on an equity basis, our share of the 2007 capital expenditures is not reflected in the $500 million capital plan for 2007. As mentioned in our January press release, the recent purchase of 240 acres of divisional land brings the total acreage count to 320 acres and provides the opportunity to expand the facility to up to 112 Bcf of storage capacity should market conditions warrant.

As operators, we are progressing on the first 24 Bcf phase. We completed drilling of the first two of three original cavern wells, and we are proceeding with the leaching operations. In December we began the construction of our gas handling facility and began drilling the third cavern well. The project is scheduled to come online in stages over the next three years. We have commitments from a variety of customers for substantially all the storage capacity of the first three caverns, ranging in terms from three to five years. We intend to file an application with the Federal Energy Regulatory Commission in the near future to expand the facility by an additional 16 Bcf. Due to strategic location, connections of seven interstate pipeline systems and ability to be expanded, we believe that the Pine Prairie facility has the potential to be as significant to our natural gas storage business as the Cushing terminal has been to our crude oil business.

On the acquisition front, earlier this month we announced the acquisition of the wholesale refined products and marketing business from Jasper Oil. We believe the acquisition will provide a solid foundation on which to grow our refined products marketing capabilities, helping us to optimize the value of refined product assets we acquired in 2006.

And then yesterday we announced that we've entered into an agreement to acquire the Bumstead LPG storage assets from AmeriGas for $52 million. Through this transaction we acquire an 133 million gallon salt cavern LPG storage facility near Phoenix, Arizona. We believe this asset will be complementary to the assets we acquired from Andrews last year and anticipate closing within 90 days.

With that I will turn it 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 year, discuss some recent financing activities and then finally walk through our financial guidance for 2007.

As summarized on slide 14, we ended the year with a strong credit profile and capital structure after spending approximately $3.4 billion of acquisition and expansion capital during 2006. At December 31, 2006, our long-term debt outstanding was approximately $2.6 billion, while book equity was approximately $3 billion. As a result, our long-term debt to total cap ratio was approximately 47%, and our fourth-quarter adjusted EBITDA to interest coverage ratio was approximately 4.4 times. Using the midpoint of our 2007 adjusted EBITDA range, our long-term debt to adjusted EBITDA ratio is approximately 3.8 times.

Just keep in mind that the foregoing metrics exclude our short-term debt and our container-related interest cost. Because our short-term debt primarily reflects borrowings under our Contango facility and revolver for hedge crude oil and LPG, as well as exchange, margin requirements in the vast majority of these borrowings are essentially sub-liquidating.

At December 31, 2006, the balance and short-term debt was approximately $1 billion, and that is roughly equal to the balance that we had at the end of the third quarter of last year. For reference, at December 31, 2006, we had over $1.2 billion of hedged crude oil and LPG and other working inventory volumes supporting these short-term borrowings essentially representing more than 120% of the outstanding short-term debt balance.

With respect to Capital Markets activity during the fourth quarter, we sold approximately 6.2 million common units in December at a price of 48.67 per unit in a direct placement to a group of institutional and private investors. The price represented a 4.5% discount to the December 11, 2006 closing price and a 3% discount to the trailing 20-day average closing price. Net proceeds from the transaction were approximately $306 million, and that includes the 2% general partner contribution and is also net of offering expenses.

A portion of that equity, plus the aggregate $1 billion of 10 and 30-year notes that we sold in November, completed the financing for the Pacific acquisition.

We have a long and positive history of successfully and timely executing our financial growth strategy, which targets funding at least 50% of our growth capital with equity and excess cash flow. As seen on slide 15, since the fourth quarter of 2001, we have invested approximately $5 billion on 38 acquisitions and a number of internal growth projects, and as a result of our disciplined financial growth strategy, our long-term debt to total cap ratio has been at or below 50% for 20 of the last 21 quarters.

Financing in advance of an acquisition for a large expansion project when market conditions are considered favorable allows us to avoid having to come to market at inopportune times and importantly enables us to direct our primary focus to capturing synergies, integrating assets or executing expansion capital plans.

Slide 16 also highlights the benefit from the execution of our financial growth strategy. Although we invested approximately $3.4 billion in acquisitions and internal growth projects during 2006, we entered 2007 over $200 million ahead of our 50% equity plus excess cash flow target, which largely pre-funds the equity component of our 2007 expansion capital program.

Now I'm going to move on to 2007 guidance. You should note that the guidance excludes selected items that affect comparability between periods. Our detailed guidance for operating financial results for the first quarter and for the full year of 2007 was furnished via an 8-K yesterday evening, so I'm just going to touch on the high points, and they are summarized on slide 17.

For the full year, we guide you to an adjusted EBITDA range of $670 million to $710 million with the midpoint of $690 million. We estimate adjusted net income ranging from about $330 million to approximately $377 million. That equates to 238 to 279 per diluted unit. Adjusted EBITDA for the first quarter of this year is estimated to range from $175 million to $187 million with a midpoint of $181 million, while adjusted net income is estimated to range from $91.4 million to just over $105 million with a midpoint of $98.4 million. On a per diluted unit basis, adjusted net income should range from $0.67 to $0.80 per unit.

Slide 18 shows the midpoint of our estimated adjusted EBITDA by segment and highlights the estimated fee-based portion of adjusted EBITDA at approximately 66%. As Harry mentioned, the full-year adjusted EBITDA guidance includes the $30 million of synergies we expect from the Pacific transaction. For additional details and assumption of our guidance, I would again refer you to the 8-K that was furnished yesterday.

And finally, before passing the call back to Greg, I will discuss a couple of housekeeping items. First, we anticipate mailing our K-1 information to unitholders the week of March 5 this year. Beginning on March 2, unitholders may access their K-1s and their Canadian T5013 reporting forms online by clicking on the blue K-1 button located on the left-hand side of our home page. And that's located at www.paalp.com. If you are a unitholder of Pacific Energy Partners at the time of the merger, you will receive tax packages from both partnerships, and you will be able to excess both partnership K-1s through our website.

Secondly, I have some information for those investors that monitor our gross receipts. As mentioned in our second-quarter earnings call, we adopted EITF 04-13 effective April 1, 2006, which requires that inventory of purchases and sales under buy/sell transactions with the same counterparty be treated as exchanges and netted for financial statement presentation. This accounting treatment lowers our net revenues for financial reporting purposes, but does not affect overall margins or profits or the amount of gross receipts our unitholders are allocated for tax purposes.

For the fourth quarter and the full-year 2006, EITF 04-13 has lowered our reported revenues by approximately $6.2 billion and $20.3 billion respectively. Though the gross receipts at specific unitholder will be allocated or varied by investment date, an estimation of per unit gross receipts for the full 2006 year can be calculated by adding the EITF 04-13 adjustment to reported revenues and dividing by the weighted average units outstanding. Individual gross receipts will be reported on each individual K-1 statement.

And then finally, with that I will now turn the call back over to Greg.

2006 was an outstanding year for the partnership and marked the completion of our transformation to an entity that has excellent growth visibility for several years to come without reliance on future acquisitions. As shown on slide 19, we exceeded our original adjusted EBITDA guidance by 40%, including unbudgeted acquisitions and about 24% excluding unbudgeted acquisitions. We increased distribution paid per unit by 11.5% versus 2005, and we generated $136 million of cash flow in excess of distributions. We also executed a $332 million internal growth program, including 46 days of Pacific capital expenditures, closed eight acquisitions for $609 million and acquired Pacific Energy Partners in a merger transaction valued at $2.5 billion, all the while maintaining the strong balance sheet and excellent liquidity.

In addition, as described by Phil, we have prefunded the vast majority of equity required to fund our 2007 expansion capital program.

Although 2006 was a record year for the partnership, we are even more excited about the future. As illustrated on slide 20, we have built an impressive suite of assets centered around key market hubs. Therefore, in addition to having access to Canada's significant crude oil resources to the north, we have direct access to varying combinations of waterborne imports of crude oil, refined products and natural gas on the Gulf Coast, West Coast and East Coast. We also own critical transportation and terminaling assets along the major transportation corridors and gateways that serve the landlocked states in the Midwestern portion of the US. We believe that PAA's proven business model and strategically located assets, combined with the rising energy demand in each of these areas as well as market volatility, bode well for PAA's future performance and growth.

As shown on slide 21, in addition to strengthening and broadening the activities within our crude oil business, we have also expanded our business platform to encompass LPG, refined products and natural gas storage. Through our acquisitions and internal growth projects, we continue to increase the depth and breadth of our activities within each of these complementary businesses. We believe the application of our business model to this expanded product and activity slate not only provides additional growth opportunities for PAA, but also yields an attractive balance which reduces PAA's overall risk profile.

As we increase the scope of our business, we continue to generate investment opportunities to build necessary infrastructure to both optimize our assets and better serve our customers. Through this process, we have transformed our partnership from an entity highly dependent on acquisitions for growth to one that will invest $500 million this year on expansion projects, which represents more capital than we have spent on acquisitions in all but two years. We expect these expansion projects to be the primary catalyst to fuel our distribution growth over the next several years.

Achieving this growth will not be without its challenges. Specifically we faced five primary execution challenges, which are shown on slide 22, and I want to make a few comments on them.

The first is to successfully integrate the Pacific acquisition. We have significant experience and expertise in this area, having successfully integrated over 45 acquisitions in the last eight years. But the acquisition of Pacific is, indeed, a challenge as it requires the integration of a large expense of assets, operations, patrol systems and personnel from a regional profit center-based structure to a functional operating environment. We believe we have a well-designed game plan in that regard, and as Harry described, we are targeting to substantially complete the integration by the beginning of the second quarter of 2007.

The next item is to achieve the targeted acquisitions synergies and deliver operating financial performance in line with guidance. The midpoint of our guidance for 2007 incorporates our projected Pacific-related synergies and calls for the Partnership to (inaudible) adjusted EBITDA of approximately $690 million at the midpoint. This is approximately $6 million higher than the preliminary 2007 guidance we provided at the time we announced the Pacific transaction.

Inevitably, actual results will be impacted by market-related developments and unforeseen operating issues both positive and negative, and our team will be tasked with making midcourse corrections. Operating financial projections seldom happen exactly as forecast, but we believe the guidance we have provided is both realistic and achievable and that we are well-equipped to address these challenges.

The next item on the list is to implement the expansion and capital program. We have a total of 22 projects that make up over 80% of our $500 million 2007 capital expansion program with no one project exceeding 15% of the total program. This diversity in our expansion capital program minimizes the adverse impacts of any unforeseen delay in any one project. Additionally the impact of these capital projects on our forecasted 2007 adjusted EBITDA is nominal as the vast majority of these projects are scheduled to come online during 2008 and 2009. However, in order to deliver operating and financial results in line with our long-term expectations and thereby position ourselves to achieve our multiyear distribution growth targets, it is imperative that we continue to timely and cost-effectively advance these projects. The current energy sector environment is ripe with competition for people, services and materials, and our projects are subject to potential delays due to inclement weather and slippage in obtaining regulatory approvals and a number of other factors outside of our direct control. As we have increased our inventory of internal growth projects, we have expanded our engineering and operations staff, and we believe we are adequately equipped to meet these challenges as well.

The next item is to maintain a strong balance sheet and attractive credit profile. As we enter 2007, the partnership is very well positioned financially. Nonetheless, the energy and financial markets have been and will likely continue to be volatile, and we will need to be vigilant in maintaining high liquidity and a strong financial position both to mitigate the highly volatile environment and to accommodate additional acquisitions.

And then finally, the last challenge there is to manage growing pains. We have really grown significantly over the last several years, and inevitably we will experience some of the normal growing pains realized by any growing organization. Moreover, as a result of the Pacific acquisition combined with other significant acquisitions, our exposure to that risk is heightened. We have taken a number of steps over the past several years to expand our organization's bench strange and enhance and maintain internal communication, and we are pleased with our positioning in that regard.

In addition, we have established incentive programs for our employees that align their interests with the objectives of our unitholders. Specifically our long-term incentive plan provides stage rewards for our employees for achieving distribution levels of $3.50, $3.75 and $4.00 per unit over the next several years.

In summary, we are pleased with our positioning for future growth, and we believe we have identified, prepared for and carry the appropriate amount of respect for the challenges that we face. We're focused in on executing our business plan, and we believe we have the right team to address the unforeseen developments that will inevitably occur.

We believe that successful execution of our business plan over the next several years will position us to deliver average annual distribution growth of 7 to 9%. To the extent that we are able to complete a meaningful amount of accretive and strategic acquisitions, we believe that will improve our ability to absorb any unforeseen challenges and further extend the visibility of our growth trajectory.

For some time now we have shared our annual goals at the beginning of each year. Accordingly, before I open the call up for questions, I want to spend a moment to outline our goals for 2007, which are shown on slide 23. Not surprisingly, these goals address many of the challenges I discussed earlier, as well as our four Pacific-related milestones.

Our goals for 2007 are to, number one, deliver operating and financial performance in line with guidance; two, to successfully integrate Pacific transaction and realize the targeted synergies; three is to execute our planned slate of expansion projects; fourth is to continue to pursue an average of $200 million to $300 million of accretive and strategic acquisitions, and fifth is to increase our total distribution paid to unitholders in 2007 by at least 14% over 2006 distribution. We feel that we are well-positioned to achieve all of these goals, and we're dedicated to delivering solid results to you, our unitholders, as we navigate through the future challenges and pursue additional opportunities. All-in-all we're excited about our current position and look forward to a productive and profitable 2007 and beyond.

Thank you all for your continued support of the partnership. We look forward to updating you on our progress throughout the year. On behalf of the management team, I also want to publicly thank all of our employees for their accomplishments, contributions and sacrifices during 2006.

I will also alert you to we have scheduled our analyst day meeting for May 30 here in Houston. If you are interested in attending, please contact Carolyn Tice or Roy Lamoreaux in our Investor Relations Department for more information.

That does wrap up our items on the agenda. We thank you all for your participation in today's call, and for those who joined us late, a complete written transcript of the prepared comments for this call will be posted on our website at www.paalp.com very shortly, and you will also have the option to download an audio version of the call.

Operator, at this time we would open the call up for questions.

(OPERATOR INSTRUCTIONS). Gabe Moreen, Merrill Lynch.

I had a question on the growth in the natural gas storage business and your expansions there. I wonder if you can talk a little bit about the contract lengths that are you are soliciting or you are seeing when you are going out for the expansions on the natural gas storage side? Are these very long-term contracts you are out there signing up for? You're managing the portfolio more on a short-term basis?

Our contracts have been in the three to five-year range on the term contracts that we have supported the expansions with.

And is that an average contract length, or is that kind of a blend of longer and shorter-term contracts?

Three to five years is pretty much the span. We certainly have gauged some that are shorter. They vary -- we have got our Bluewater facility up in Michigan. That has a combination of anywhere from year-to-year contracts with contracts that go out three or four years. At Pine Prairie we have -- the majority of those are three to five-year contracts. We have no short-term contracts there, and those -- actually, in some cases because that is a phased in capacity, some of those contracts don't start for two years, but then they have three to five years from that point. So, from that standpoint from today, you would look out and say they actually go as far as seven to eight years.

Got it. And, Greg, if I could follow up on that in terms of asking about whether your marketing affiliate is going to be contracting for any of these expansions in terms of taking capacity, say, at Pine Prairie?

To date we have not. We certainly would not rule that out. Our number one goal right now is just to get the business up and operating. We've had very good success with Bluewater. I think when we first bought it, we were targeting $15 million to $18 million of EBITDA. That is now I think we've announced this publicly has been throwing off $23 million to $25 million of EBITDA. Our Pine Prairie obviously has not started generating revenue, but it should start late this year and then be phased in. So right now we been trying to initially just get third parties to get in and get the business going, but we certainly would not rule out trying to take our business model and extend it over that as well -- find some long-term upside we think.

Got it. If only everyone had growing pains like you guys. Thanks very much.

Sam Arnold, Credit Suisse.

Just a question for you on the transportation activity segment where you guys have stated guidance of an average segment profit of $0.34 a barrel. I assume that excludes the long-term incentive plan charges, but even so it appears to be quite a bit higher than in years past as Plains stand-alone. Can you talk a little bit about that as those contracts are coming up for renewal or kind of why you expect to increase performance?

It is mainly driven by the fact that the Pacific assets had higher tariffs. So when you combine their average [tariffs] were higher than our historical 25, 26 range barrels, that drives it up to $0.34 a barrel.

Okay. That is pretty significant. I guess that is all I have.

(OPERATOR INSTRUCTIONS). Ross Payne, Wachovia.

Great guidance year for '07. Can you give us some kind of indication on where you think that that level might be at year-end or possibly what we can think about as an exit rate from a debt to EBITDA standpoint as you finish out the year?

Well, right now from a standpoint of we preposition with the equity, of the $500 million capital program, $0.04 is going to be funded with cash flow. I think we're showing right now based upon our guidance of about $45 million would be provided from that. The balance is going to be borrowed under our revolver, but probably half of that 450 is going to be short-term debt because we raised so much excess equity, we used it to pay down short-term debt that normally finances contango borrowings. So you will only look for the debt to increase about $200 million to $225 million -- Al just corrected me -- about 250 by the end of the year.

And then, of course, your next question is on EBITDA. We have given guidance for '07. Obviously a lot of these capital projects kick in at the end of '07, the beginning of '08, and so you're going to see that number come down. I think right now we are looking at it on a year-end '06 to projected '07 of about 3/8, we will expect that number to be at that or probably a little bit lower as we go forward.

So we are in pretty good shape for having done $3.4 billion in capital last year. Without regard to some of the uplift that we think we're going to get through the synergies, we feel pretty good about the capital structure.

Very good. You know S&P has you on negative outlook right now. Any hopes for getting that off in any kind of timeline there that you might think you may be able to convince them to take that off?

Boy, you ask tough questions. Certainly our hope and belief is that as we demonstrate the execution of the Pacific transaction by hitting these benchmarks and we put some pretty specific goals out there to get them integrated, to get it converted over from a regional to a functional. We have incorporated already the capital programs. I think what they wanted to see is that we delivered on the acquisition, and I think whether it is May or whether it is August, it is certainly sometime in '07 that we think we will be able to declare victory on all the critical issues that they were looking at, and we hope that they see the wisdom of moving us back up. Not just to get up off negative watch, but where we should be, which is rated about a click or two higher.

Okay. Very good. Thank you very much.

There are no further questions at this time. I would now like to turn the call back over to management for closing comments.

Thank you. Thanks to everyone who attended the call this morning. We really appreciate your support. We look forward to providing you progress reports of not only the integration of Pacific, but also of these other projects and continuing to grow the Company for the benefit of all of our stakeholders. Thank you very much.

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