Plains All American Pipeline LP (PAA) 2007 Q2 法說會逐字稿

Welcome to Plains All American Pipeline's Second Quarter 2007 Results Conference Call. 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 such words 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 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 those non-GAAP financial measures to the most directly 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 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 will now turn the call over to Mr. Greg Armstrong.

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

PAA generated strong operating and financial results for the second quarter of 2007. Highlights for the quarter are summarized on slide three. The partnership reported net income EBITDA and net income per diluted unit of $104.8 million, $210.2 million, and $0.78 per unit, representing percentage changes of 31%, 76% and negative 4% as compared to respective second quarter 2006 results of $80.3 million, $119.6 million and $0.81 per unit.

Excluding selected items impacting comparability, second quarter adjusted EBITDA was $214.8 million and adjusted net income was $120.2 million or $0.91 per diluted unit, representing percentage changes of 68%, 35% and negative 12% compared to the corresponding results for the second quarter of 2006 of $128.2 million, $88.9 million and $1.03 per unit.

As indicated in the press release we issued on May 29th, these adjusted results exceed the upper end of our guidance range we provided in our May 2007 conference call and as slide four shows, this marks the 22nd consecutive quarter that Plains All American has delivered results in line with or exceeding our guidance.

As mentioned last call, we completed the integration of Pacific early in the second quarter. Moreover, as reinforced by the partnership's strong first-half operating performance and financial performance and our increased guidance for the second half of 2007, we have achieved a combined run rate level of operating and commercial synergies that will exceed our targeted synergy objectives for 2007. Subject to timing accelerations and delays, as well as capital project substitutions and modifications that are fairly routine for large multiyear project execution, we believe we are on track to achieve our Pacific related financial targets for future periods as well.

The remainder of today's call will be divided in three main parts. First, Harry will review second quarter operating results, address major operational assumptions for third quarter guidance, and provide an update of our expansion, capital projects and recent acquisitions.

Next, Phil will discuss our capitalization, liquidity, and recent financing activities, as well as review updated financial guidance. And then last, I'll wrap up the call with a few closing comments on our current performance versus our 2007 goals and provide some insight into our outlook for the future and also address the recent market transition from contango to backwardation.

At the conclusion of our prepared remarks, we will have a question and answer period and shortly after the completion of the call we will post a complete written transcript of the prepared comments, as well as a downloadable audio version of the call. With that, I'll now turn the call over to Harry.

Thanks Greg. Each of our segments performed above the second quarter guidance we provided on May 2nd this year. And as shown on slide 5, adjusted segment profit for our transportation segment was $89.4 million or $0.34 a barrel, and was approximately $10.4 million above the midpoint of our guidance range.

Transportation volumes were approximately 2.9 million barrels a day and that included pipeline volumes of approximately 2.8 million barrels a day. Our pipeline volumes exceeded our guidance by right at 102,000 barrels a day. Although there are several ups and downs, most of the volume increases attributable to our Basin pipeline system.

I'd also point out that increased revenues from our Canadian trucking operations and from our pipeline loss allowance sales contributed to the over-performance in this segment. Adjusted segment profit for the Facilities segment was $4.3 million above the midpoint of our guidance range at $31.8 million or $0.27 per barrel with volumes of 38.8 million barrels per month. The strong segment results were mostly attributable to the stronger than expected gas storage earnings from our 50% ownership interest in the PAA/Vulcan gas storage joint venture.

Adjusted segment profit for the marketing segment was $92.9 million or $1.21 a barrel, which exceeded the midpoint of our guidance range by $26.9 million. Volumes were 843,000 barrels a day, and overall we're in line with our guidance. Our marketing results benefited from a combination of favorable market conditions, improved margins in our gathering and marketing business -- and that includes improved margins on our truck gathered volumes, and a stronger than forecasted foreign exchange associated with our Canadian activities.

In a moment, Phil will discuss our 2007 guidance. This guidance assumes third quarter volumes in the transportation segment of approximately 2.8 million barrels a day. Estimated volumes for each of our larger systems are shown on slide 6 and are generally in line with recent trends.

Third quarter guidance for our Facilities segment is based on an average capacity of 37 million barrels per month of crude oil, refined products and LPG storage, 12.9 Bcf per month of natural gas storage and 17,000 barrels per day of LPG processing throughput. The third quarter guidance for our marketing segment incorporates lease gathering volumes of approximately 705,000 barrels per day, LPG sales of 65,000 barrels per day, waterborne foreign crude volumes of 75,000 barrels per day and refined products volumes of 15,000 barrels per day, for an estimated total volume of 860,000 barrels per day.

We expect moderately strong market conditions in the third quarter, however, we expect marketing conditions to weaken in the fourth quarter. Slide 7 shows snapshots of the forward NYMEX curve as of June 15th to July 17th and two trends are apparent from the slide. First, you can see we're no longer in a contango market and secondly, the outer month spreads have flattened out. Typically the market we currently expect in the fourth quarter is the most difficult type of market to extract upside value using our risk management strategies.

Later in the call, Greg will comment a little more on the effects of a backwardated market on our business.

Maintenance capital expenditures for the quarter were $10.9 million and we expect full-year 2007 costs to be right at $52 million, which is about $7 million higher then our original forecast.

Moving forward to our 2007 capital expansion program, as shown on slide 8, so far this year we've completed or nearly completed 5 internal growth projects. In January we completed the last 300,000 barrels of our 900,000 barrel phase one expansion at our Corroborate crude oil storage facility in Canada. In February we placed a 6,000 barrel per day high period rail terminal into service. In June, we placed into service the final 1.3 million barrels of tankage at the St. James stage one storage facility.

We expect to place our 55,000 barrel per day Cheyenne pipeline system into service around the 1st of September and we also expect to place into service the first 100,000 barrels of our 850,000 barrel tank expansion at our Martinez terminal in September. The remaining 750,000 barrels a day of that expansion will be placed in service in fourth quarter.

As shown on slide 9, we're proceeding with other major projects, including the 2.7 million barrel phase two expansion of St. James, as well as the Salt Lake City pipeline expansion and our Ft. Laramie terminal project. We've experienced some weather related delays at our 3.4 million barrel Cushing phase six expansion. We still expect the majority of those tanks to be in service by the end of the year. The remaining [courts] will come on line in the first part of 2008.

We also began construction of our Patoka terminal during the second quarter and our Pier 400 project, we're waiting on the Port of Los Angeles to relay the draft environmental impact review.

Since our last conference call we've increased our 2007 capital program by about 10%, from $500 million to roughly $550 million. The increase reflects the net impact of scope changes, timing estimates and fine tuning of costs at a number of other projects, but it's primarily due to a $12 million upgrade of our Elk City to Cushing pipeline system, an increase in our forecasted costs for the Cheyenne pipeline system and the addition of a number of smaller projects, some of which will carry over into 2008.

As the operator of the PAA/Vulcan gas storage joint venture, we are continuing our leaching activities on the first Pine Prairie cavern wells and expect to place this cavern into partial service in early 2008. Also, we recently completed a nonbinding open season for an additional 16 Bcf of storage capacity at Pine Prairie for 2010 and beyond. We're very pleased with the results of the open season and it really supports our plan to file an application with the FERC for a 16 Bcf expansion later this year.

And then on the acquisition front, we closed the $52 million Bumstead LPG storage facility acquisition last month, making it the third acquisition this year. This facility has approximately 133 million gallons of butane/propane working storage capacity and provides a nice compliment to the Andrews LPG assets we acquired last year. We remain active and continue to pursue our target of averaging $200 to $300 million a year in acquisitions.

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

Thanks, Harry. During my portion of the call I'm going to review our capitalization and liquidity at the end of the second quarter, discuss our recent financing activity, share a few comments about our accounting activity that did impact our second quarter results, and then walk through third quarter guidance and the updated guidance for the full year.

Given all the attention on both the weakness in the capital markets and the very recent weakness in the MLP equity capital markets, I really am very pleased to report that PAA is extremely well positioned in both regards, as we ended the second quarter with a strong credit profile and capital structure and excellent liquidity.

As summarized on slide 10, at June 30th, PAA's long-term debt outstanding was approximately $2.6 billion, while book equity was approximately $3.4 billion. As a result, our long-term debt-to-total cap percentage was approximately 44%. Our second quarter adjusted EBITDA-to-interest coverage ratio was approximately 5.2 times and using the mid-point of our 2007 adjusted EBITDA range, our long-term debt-to-adjusted EBITDA ratio is approximately 3.4 times.

In addition, our long-term debt has an average tenure of approximately 14.4 years and we have no maturities or long-term debt until mid-2009, when we have a relatively small $175 million tranch maturing. We also have excellent liquidity and we recently extended the maturity of our committed $1.6 billion revolver and increased the size of our uncommitted contango facility from $1 billion to $1.2 billion. At June 30th we had approximately $1.5 billion of undrawn committed capacity available to meet our working capital needs and to fund future acquisitions.

As shown on slide 11, even with over $5.2 billion in cumulative acquisitions and expansion capital investments since the fourth quarter of 2001, we've been within our targeted 50% of long-term debt-to-total cap percentage ratio in 22 of the last 23 quarters.

The foregoing metrics exclude our short-term debt and contango-related interest costs. This is because our short-term debt primarily reflects borrowings under our contango facility and revolver for hedged crude oil and LPG, as well as exchange market requirements, and these borrowings are essentially self-liquidating as the inventory is sold and proceeds are used to pay down the debt. Also, our contango-related interest costs are reflected in gross margin as the direct cost of these activities.

At June 30th the balance in short-term debt was approximately $890 million and that's in line with our balance as of March 31st. I might mention that to the extent we remain in a backwardated market we will significantly reduce our short-term debt balance related to contango storage.

Our financial growth strategy targets funding at least 50% of our growth capital with equity and excess cash flow, as well as maintaining a prudent amount of equity to support our merchant activities. Consistent with our history of proactively financing our capital needs, in June we issued approximately $6.3 million units in a direct placement, the total proceeds of approximately $383 million and that includes the general partners' contribution as well.

This transaction is consistent with our credit ratings objective and our overall capital structure management as we continue to expand our merchant functions, including refined products and implement our various capital projects, including the construction of approximately 13 million barrels of new tankage, some of which will be utilized by our merchant activities. A portion of the proceeds from the equity transaction was used to fund the acquisition of the Bumstead LPG storage facility and our expansion capital project and the balance was used to reduce our short-term debt and our inventory related borrowing.

As we indicated in our last conference call, we have a substantial inventory of internal growth projects. We expect to invest an aggregate of $1 billion to $1.2 billion on organic projects over the three-year period from 2008 to 2010 and we expect to continue to be active on the acquisition front. Maintaining a strong capital structure also provides us with a solid level of prefunding, should we have the opportunity to make a large acquisition, regardless of the then current market conditions.

As shown on slide 12, we're approximately $363 million ahead of our 50% equity in excess cash flow target.

There are three accounting items that I want to address that impacted the second quarter results. First, our LTIP expense for the second quarter was $21.8 million, $19.5 million of which is reflected in the selected items impacting comparability. This compares to our quarterly guidance of $10 million, of which $9.3 million is included as the selected items. Of the $11.8 million total difference, $7.5 million reflects the cumulative impact of a higher unit price on the LTIP liability accrued during prior service periods. The bulk of the remaining difference is related to a $2.8 million accrual triggered by our determination that achieving a $3.50 annual distribution level is now considered probable.

Second, our second quarter net income was also impacted by an approximate $9 million net loss on the sale of non-core assets, the majority of which were acquired in the Link acquisition in 2004. Gains and losses of this type are reflected in depreciation expense, similar to impairment expense.

The last accounting item is related to a $10.8 million deferred tax provision recorded in the second quarter. In June, the previously proposed Canadian legislation imposing an equivalent to a corporate entity tax on certain flow-through Canadian entities became law. We believe this legislation will apply to our Canadian activities that are conducted through our Canadian limited partnership, however, there is some uncertainty as to whether the legislation does apply and our Canadian counsel is seeking some clarification. As enacted, certain aspects of the legislation should not apply until the year 2011 unless our Canadian limited partnership exceeds certain normal growth guidelines.

Since the law's been enacted we recorded the deferred tax provision, again, of $10.8 million as of June 30th and it's almost entirely related to prior periods and represents primarily depreciation and goodwill booked tax differences. I should also note that we conduct a portion of our Canadian activities through a corporation which is already subject to Canadian income tax. The good news is that generally any tax our flow-through entity pays in Canada will result in a tax credit for our US unit holders when they file their US tax return.

One final comment on the second quarter of 2007 coverage and that's that our distribution coverage was 1.4 times the $3.32 annualized distribution that was recently declared based on weighted average diluted units outstanding during the quarter. Our website reconciliations includes the details of this calculation.

Now moving on to financial guidance. You should note that this guidance excludes selected items that affect comparability between periods, namely the impact of SFAS 133 and our LTIP expense. For more information, please see the detailed guidance that we furnished in an 8-K yesterday evening. Since that 8-K is available on our website, I'm only going to touch on the highpoints of the guidance and that's also included on slide 13.

For the third quarter of this year we'll guide you to an adjusted EBITDA range of between $175 million and $195 million. That equates to a midpoint of $185 million. We estimate third quarter adjusted net income will range from approximately $85 million to $110 million. That equates to $0.55 to $0.75 per diluted unit.

For the full year, we've increased our adjusted EBITDA guidance range to approximately $760 million to $800 million with a midpoint of $780 million. This midpoint is approximately $90 million higher than the initial guidance we provided for the year 2007. Again, for additional details and assumptions I'd refer you to the 8-K that we furnished yesterday.

And finally, for those investors interested in our gross receipts for tax purposes, please visit our new Gross Receipts tab located under the Investor Relations portion of our website. This webpage gives the approximation of this quarter's contribution to annual gross receipt, as well as historical gross receipts.

And then with that, I'll turn the call back over to Greg.

Thank you, Phil. We are very pleased with the second quarter results and look forward to the rest of 2007. First, as shown on slide 14, we are well positioned to achieve the five goals for 2007 that we established at the beginning of the year. Second, we believe PAA is well positioned for the future. Specifically, as illustrated by the montage on slide 15, we believe the combination of our base level cash flow, incremental contributions from organic growth projects and future distributions from our gas storage joint venture underpin our ability to grow PAA's distribution at an average rate of 79% per year over the next several years.

We also believe that any major future acquisition will likely extend the period of visibility for continuing that growth trend or serve to offset unforeseen challenges or delays in our capital projects.

Third, as illustrated by the montage on slide 16, we have a disciplined financial growth strategy and as a result of consistently executing that strategy we have a strong capital structure and excellent liquidity that will facilitate the financing of future capital projects and acquisitions.

Before we open the call up for questions, I want to spend a few minutes addressing the anticipated impact on PAA associated with the rapid transition in July from a steep contango market to a backwardated market. First, let me provide a little bit of background.

Throughout most of the time period from early 2005 through the end of June 2007, we have experienced favorable contango market conditions. A contango market is favorable to our commercial strategies that are associated with storage tankage, as it allows us to simultaneously purchase production at current prices for storage and sell at higher prices for future delivery.

As Harry mentioned earlier, in July 2007, the market for crude oil transitioned rapidly to a backwardated market, which has a positive impact on our lease gathering margins, because crude oil gathers can capture a premium for prompt deliveries, but it provides little incentive to store crude oil as current prices are above future delivery prices.

We refer to the interaction between our lease gathering activities and the commercial strategies used with our tankage as counter-cyclical balance, which we believe has a stabilizing effect on our operations and enables us to generate a base level of cash flow in either environment.

As a result of the wide contango spreads experienced over the last couple of years and a fair amount of price structure volatility, we have been able to generate not only a base level of cash flow, but in many quarters we have also been able to generate significant additional profitability. At the risk of being labeled sandbaggers, in the guidance we have provided each quarter we have been very deliberate about reducing or eliminating the incremental impact of these favorable market conditions from our guidance beyond the very near term, as they are unpredictable and very difficult to forecast.

With that as background, in response to the question, what impact will the shift from a strong contango market to a backwardated market have on PAA's guidance numbers, the answer is, for the remainder of 2007, in two words, not much. That belief is illustrated and reinforced by the guidance we furnished last night for the second half of 2007.

If you look at the most recent guidance for the second half of 2007, you will quickly see that it is very much in line with and in fact, slightly ahead of the second half guidance we provided at the beginning of 2007 and again at the end of the first quarter. We have not provided guidance numbers yet for 2008, but I can say that our long-term outlook, upon which we have based our distribution growth targets, is not predicated on a steep contango market. It does assume there will be a fair amount of volatility and that our assets and our business model will have the opportunity to generate solid results in that environment. At this point we see nothing to cause us to change that outlook regarding future volatility.

We believe the counter-cyclical balance provided by our asset base and our business model will enable us to continue to generate a solid base level of cash flow in the current backwardated environment. If the market remains in the current backwardated structure, our future results from our marketing segment will likely be less than those generated during the more favorable periods of pronounced contango, but are still expected to be in line with our base level expectations, upon which we manage the business long-term and upon which we also set our distribution growth targets.

I would also point out that in most cases our profitability during a backwardated market would be enhanced if there is volatility in the pricing structure and we think the fundamental and market related factors suggest we will continue to experience a volatility crude oil market.

I want to touch on two additional related matters before I leave this topic. The first is that the transition to a backwardated market will also have a beneficial impact on our total debt to total capital as we will be liquidating our inventory position and the proceeds will be used to substantially reduce our short-term debt. Our short-term borrowings at the end of each of the last four quarters have ranged from $900 million to $1.2 billion and as Phil mentioned a bit earlier, in the event we remain in a backwardated market we expect to realize a significant reduction in that balance.

The second and final point I would make on this topic is that the impact on EBITDA will be meaningfully less than the amount implied if you were to assume an amount of storage capacity and apply it to an assumed contango spread. Setting aside the issues of getting the capacity figure right, you must also take into account the cost incurred to realize a portion of that spread, including the interest costs incurred while the contango barrels are in storage. As we mentioned many times before, we include the interest cost on short-term borrowings for hedged inventory as a cost of goods sold and thus only the margin on the contango transactions are reflected in EBITDA.

Accordingly, in the last 12 months, EBITDA for the marketing segment has been reduced by approximately $52 million associated with the interest on hedged inventory borrowing.

And then finally, we want to thank all those who attended PAA's Analyst Meeting on May 30th. For those who did not attend, copies of the slides used at the meeting and audio recordings of the presentations are available on our website at www.PAALP.com.

That wraps up the items on our agenda. Thank you all for your participation in today's call. A complete written transcript with prepared comments will be posted on our website at www.PAALP.com very shortly. And you'll also have the option to download an audio version.

Joe, at this time we'll open the call up for questions.

(OPERATOR INSTRUCTIONS) Ross Payne with Wachovia Capital.

Greg, can you talk to how much of your storage is the third parties versus your own account?

Ross, it varies really by location and is a pretty dynamic changing number right now. We haven't published that information.

Okay. I would assume the demand for storage is going to be less under this market condition to third parties, but do you assume that that's going to be made up in your normal business on a backwardated basis?

We were conversing here off line. I can give you the aggregate number. I just don't want to give it by location. But it's in the 55 to 60% range of the tankage is to third parties. And to kind of clarify perhaps what I was trying to get to earlier, you know, what we call base level results, not the baseline plus, but what we call base level results, which is what we try and manage the business on over an extended period of time, we do think that there will be offsets to the counter-cyclical balance works.

What we're really trying to say is, the significant excess profits that we get called sandbaggers for because clearly the market has been very favorable for about 2.5 years. We're not saying the market won't come back into more favorable conditions, but that's not how we manage the business. We really take that as something that's incremental to the baseline, not a part of the baseline.

Okay, very good. So you'll still be able to achieve your results without that.

A lot of the people that lease tankage from us, they're leasing it operationally. We don't lease, for the most part, lease tankage to people who do the same contango trades that we do. So we don't expect that business to go away just because contango--.

Long-term contracts that are operational in nature.

Okay. Any idea what the average life on those contracts is?

Again, it's going to vary by location, but we wouldn't expect that mix of third party tankage to change a whole lot over an extended period of time. We have some contracts that are short-term that have been rolled for many many many years throughout all kinds of markets.

Okay. One other question for you, Greg. What kind of target do you have for your debt to EBITDA? It looks like your leverage is moving down nicely post the PPX acquisition, but what do you target from a long-term debt to EBITDA level?

Ross, several years ago when a bigger portion of our earnings and cash flow was coming from non-fee-based we had picked a target of -- we called it debt to EBITDA of 3.5 or less. When we, a couple of years ago started expanding quite aggressively into the pipeline sector, we kind of moved it up to approximately 3.5 to 1. Today, we're a little more comfortable with that number moving up probably to 3.5 to 3.8, but it still has a 3 in front of it.

I'll tell you what you see today is capacity. We raised excess equity to be able to position for the opportunity that may exist when it's difficult for others to get to the capital markets and we've already in effect prefunded, as Phil mentioned. So, I wouldn't take the 3.3 as an indication that we're migrating there. We think in that 3.5 to 3.8 range we are consistent with our BBB - BBB-plus target, especially as we've seen a higher percentage of our business come from fee-based activities.

Sam Arnold with Credit Suisse.

Congratulations on the quarter. Very strong in the marketing. I was wondering if you could talk a little bit about that? How much of the results could you break down were attributable to kind of the issue that you were seeing at Cushing versus St. James? I mean it seems like you guys would probably be able to make quite a bit of money off that type of trade that was going on and just trying to find out how sustainable that portion is?

They're totally different markets. You're asking was there an arbitrage that we captured between the $5 or $6 discount in WTI.

Right, just because Basin volumes were up quite a bit and then with Capline you would think that there would be a lot more import volumes coming into St. James and things of that nature. So I'm just wondering if you guys had a quantity to that, because Cushing prices were so much lower than St. James because of all the stuff that was going on with McKee and some of the other refineries downstream of Cushing?

McKee definitely helped the Basin buying, but even though you had higher prices at St. James, Capline was still at very high levels and we continue to see Capline operated at high levels. And just for clarification, all that goes into our transportation segment, not our marketing segment.

Okay, it does. So you don't do any trading around that?

I think that the misassumption, Sam, may be that the barrels are completely fungible. I mean, they physically, in order to take advantage of those arbitrages that you'll see on the screen, they have to have transportation piped in there as well as the forward curve in the delays associated with the bases differential. So, it's probably easier for some traders to create value on a screen than it is in reality.

And I guess what I'm saying is, those markets aren't directly linked. It's not natural gas where it's completely fungible and if it's in a pipeline here you can back transport it, so to speak. You can get it to that optimal market and in this case it's more logistical nightmare, if you will, which is what makes it very complicated with 15 different grades and varieties of crude.

Okay, so it really wasn't a big increase in Capline volumes because of what was going on at Cushing, just more imports?

More imports and clearly there was some very attractive contango levels during the second quarter. The fact is, it widened out I think toward the end of the first quarter, first part of the second quarter quite a bit.

Right. But isn't the contango because of what was going on at Cushing?

Partly. The McKee refinery probably extended the period of contango, but ultimately those markets always remedy themselves. So there's been a big pull-down in sweet barrels is what one would probably conclude and I think you can see a little bit of that in the Oil Daily article that came out today. The one thing I would probably just want to make sure everybody takes away from this is if you recall even when we had a real strong first quarter and we announced that we were updating our guidance for the second quarter, we didn't change the second half of the year. From our perspective the market is doing pretty much what we would have thought it would be doing, maybe a little bit faster, but overall we're always managing for a baseline. So when you compare third quarter and fourth quarter, we're actually showing a slight down-tick in the fourth quarter. And that's because some of the contango activity that transitioned in July doesn't really affect you until August, in terms of when you report earnings. Because you report the value when you have the sale in the quarter, not when you have the contango spread show up.

Okay, great. Thanks for the clarification, appreciate it.

Gilbert Alexander with Darko & Associates.

Sorry to ask this, but I didn't get all of it properly. You mentioned you might be going -- you will be going to a 3.50 dividend rate. Do you have a target date for that or when it might happen?

Well, actually, just to be clear, for accounting purposes we're required at the end of each quarter to make an assessment of probability and the definition of probability is probably not the same as the layman's definition. But it's when we get to the point where it's -- I think the terminology is the preponderance is more likely than not, and once we get there, it just simply requires us to make an accrual for any equity incentives associated with that level. So, no, we haven't picked a date to actually go to there, all we're saying is that again, for accounting purposes, we've reached that threshold.

Clearly, 3.50 falls within the fairway of our target guidance over time of 7 to 9%, but we haven't given any guidance as to trying to pick a date for that.

(OPERATOR INSTRUCTIONS) John Edwards with Morgan Keegan.

Greg, could you expand a little bit further, you were talking about how things have transitioned from the contango to the backwardated market, and as far as what the contribution to the business has been from contango versus backwardated? I mean, you did talk about that, but I'm trying to get a sense here of, you know, you're trying to guide us, I think, you're saying there's no change to the base outlook when you go to backwardated, but I'm just -- what's the relative contribution to the business when you are at contango versus backwardated? Maybe you could talk about it that way?

I think what we're really trying to say is, again, it's for many many quarters we've outperformed -- and again, I use that term sandbaggers affectionately. I guess what I'm trying to say is the guidance that we were providing at the beginning of the year for the year and even in the future periods to the extent we were talking about projecting base levels for the Pacific assets. In all cases we were really looking at more of a balanced market, not an extreme contango or an extreme backwardation. We certainly weren't looking at a flat market, because that's our worst situation, you know, where the price of crude oil is the same in every single month. Generally when those happen they're in transition, they don't stay very long.

So I guess what we're really trying to guide people to, if you look at our fourth quarter, that's more of a run rate that's a pure forecast based upon what we've seen in terms of the slight backwardated market, not an extreme backwardated and certainly not an extreme contango. And what we've been experiencing over the last several quarters is one that's both good volatility, as well as good contango.

We really can't spike out the amount that we make in what you might call a pure contango arbitrage, because there are several other things that go on intra-month. In some cases, if we get a call from a refiner that says look, I'm in a pinch, we need to borrow some of your storage because we've got things coming in. For developing a long-term relationship, we may not make as much out of those tank barrels as we could have if we simply wanted to, if you will, be mercenaries. And so it's really difficult for anybody from the outside to calculate what that earnings capacity is and it's difficult for us to share that information without getting into some proprietary information on how we manage that.

Suffice it to say, we are an MLP. We manage long-term relationships and we manage long-term assets to deliver stable results. That's what we call the baseline. In a favorable market like we've been seeing, we enjoy what we call the baseline-plus. We use those incremental cash flows not to raise our distribution, but to pay for additional capital that in many cases is invested in fee-based capital that takes temporary increases, but ones that you can't predict, and results in repeatable increases, just at a much lower level.

That's a long story to tell you I can't quantify the amount, other than to guide you to look at the fourth quarter and say that's probably typical, because it's not affected by the transition. It's simply saying that's the kind of market we manage for. Sometimes we're a little more bullish if we think the market's going to be volatile. We certainly have the input of our guys on terms of trying to forecast the future and we do it more with respect to allocating our assets, not trying to bet on which way the price of oil is going to go or the way the market structure is going to go.

Okay, great. And then just a housekeeping item. What's the maintenance CapEx outlook at this point?

The total for this year -- I think we started off the year at $45 million. The current estimate is $52 million. That's within a range of probably 40 to 60 is probably the number, unless we add more assets. I mean, what happens John, last year I think we were under-spent relative to what we had targeted. We had some carryover. Part of it is a function of weather. We're certainly forecasting for the second half of the year since it's been so rainy the first half, we're going to have an opportunity to catch-up on some projects.

At this time there are no further questions in queue. I'd like to turn the call back over to Management.

First, again, thanks to everyone for attending and for supporting PAA as it continues its growth path and we look forward to giving you an update at the end of the third quarter. Thank you, Joe.

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