Plains All American Pipeline LP (PAA) 2007 Q3 法說會逐字稿

Welcome to Plains All American Pipeline's third-quarter 2007 results conference call. During today's call, the participants will provide forward-looking comments on the Partnership's outlook as well as a 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 web site 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 selecting 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, Jackie and welcome to everyone. This morning, we have had a little bit of technical difficulties on getting our slides uploaded. If you are listening to the webcast, your slides are available. Right now the slides, if you are on the phone call, are being uploaded as we speak on the website and should be available momentarily so that you can follow along.

As we discussed in our last conference call, our biggest challenge for the second half of the year would be to address the rapid transition of the crude oil market from a contango structure to backwardation; and as indicated in our August 6 guidance, we forecasted that the transition and other factors would mostly affect our fourth-quarter results.

Yesterday, we once again reported strong results that were at the upper end of our guidance. Although there was some shift of adjusted EBITDA between the third and fourth quarters, we increased the midpoint of our guidance for the full year of 2007 by $7 million and provided preliminary adjusted EBITDA guidance for 2008. Highlights for the third quarter are summarized on slide 3 and I have just been informed that the slides are available now on our website.

As noted there, the Partnership reported EBITDA, net income, and net income per diluted unit of $183 million, $98.4 million and $0.66 per unit, representing percentage increases of 32%, 3% and a decrease on net income per unit of 26% compared to respective third-quarter 2006 results of $138.8 million, $95.4 million, and $0.89 per unit.

Excluding selected items impacting comparability, third-quarter adjusted EBITDA was $196.4 million and adjusted net income was $111.5 million or $0.77 per diluted unit, representing percentage changes of 50%, 27%, and a negative 19% compared to corresponding results for the third quarter of 2006 of $131 million, $87 million, and $0.95.

As slide 4 shows, this marks the 23rd consecutive quarter that Plains All American has delivered results in line with or exceeding our guidance.

While cash distributions are arguably the most important measure of an MLP, one additional item I want to address is the decrease in our net income per unit between periods. Our net income per unit for the current period is impacted by increased incentive distribution payments to the general partner as a result of increasing distributions paid to L.P. unitholders as well as the manner in which those increases are handled for financial reporting purposes.

In addition, net income per unit for the comparative third-quarter periods reflects the issuance of equity during the latter part of 2006 and also in June 2007 to fund the Pacific acquisition and the equity portion of the 2007 capital program as well as to pre fund future expansion projects or acquisitions. This equity capital is intended to keep our capital structure strong while enabling PAA to make capital expenditures to increase future cash flow via expansion projects, acquisitions, and realization of synergies.

Since closing the Pacific acquisition in November 2006, we have increased annualized distributions to limited partners by 12% from $3.00 per unit to $3.36 per unit.

Later in the call, Harry and Phil will address the major assumptions incorporated into the preliminary adjusted EBITDA guidance we are providing for 2008. Although there have been some adjustments with respect to the timing of certain capital projects, overall this guidance is very much in line with the fundamental baseline performance envisioned at the time we announced the acquisition of Pacific in June, 2006 and upon which we established our multi-year target range for growing our distribution at an average rate of 7% to 9% per year.

In addition to delivering baseline performance, our assets and business model are also designed to capture additional margin during certain types of markets. From early 2005 through mid 2007, we experienced favorable market conditions and PAA's operating results certainly benefited from these conditions.

Our initial 2007 midpoint adjusted EBITDA estimate was $690 million, which reflected our baseline run rate including the cash flow associated with expansion projects projected to come online in 2007, as well as the synergies expected as a result of the Pacific transaction. This guidance also reflected the visible impact of favorable market conditions for the first-quarter 2007 results.

As Phil will discuss in a moment, our current 2007 midpoint adjusted EBITDA estimate of $787 million includes an approximate $97 million uplift over the midpoint of our initial guidance. A portion of this excess performance is partially associated with stronger baseline activities, but the bulk is associated with the strong contango market conditions and favorable volatility we experienced throughout the greater part of the year.

Similar to how we prepared our initial forecast for 2007, our forecast for 2008 is based on the assumption that market conditions are not as favorable as we have experienced during 2005, 2006, and the first half of 2007. Accordingly, we have projected $785 million for the midpoint of our adjusted EBITDA in 2008. This represents a 14% year-over-year increase over our initial $690 million baseline adjusted 2007 EBITDA figure and is a slightly higher percentage increase if the first-quarter impact of 2007 of favorable marketing conditions were excluded from the 2007 initial guidance.

This level also provides us with solid coverage of our current distribution level as well as room to continue to grow distributions, especially as we continue to complete our capital projects that are scheduled to come on-stream throughout 2008, 2009, and 2010.

To the extent that the market returns to contango or we experience volatility that favors our asset allocations, we believe there may be upside to this number. That being said, we continue to believe the most prudent course of action is to provide financial guidance in line with our baseline forecasts and thereby exclude any market upside that is not visible at the time the forecasts are prepared. With those introductory comments, I will now turn the call over to Harry.

Thanks, Greg. In my part of the call, I will review third-quarter operating results, address major operational assumptions for the fourth-quarter guidance and provide an update on our expansion capital projects and recent acquisitions.

Each of our segments performed above the midpoint of the third-quarter guidance we provided on August 6, 2007. As shown on slide 5, adjusted segment profit for our transportation segment was $92 million or $0.36 a barrel and was $1.5 million above the midpoint of our guidance range. Transportation volumes were approximately 2.8 million barrels per day, and they were in line with our guidance. Segment profitability was favorably impacted by higher prices received on our pipeline loss allowance barrels.

Adjusted segment profit for the facilities segment was $28.9 million, or $0.23 a barrel and was about $1.9 million above the midpoint of our guidance range. Volumes were at 42.4 million barrels per quarter and that's about 2.7 million barrels above our guidance, which was -- and that difference is primarily due to the acquisition of the Bumstead facility in the third quarter.

Adjusted segment profit for the marketing segment was $75 million or $0.98 a barrel and that exceeded the midpoint of our guidance by $7.5 million. Segment volumes were about 833,000 barrels per day during the quarter. That's a little lower than volumes in our guidance. So even though our lease gathering volumes were a little lower, the primary reason for the over-performance was the strong gathering -- strong margins we experienced in our lease gathering business. And this is typically the case when the market transitions from contango to backwardation.

In a moment, Phil will discuss our fourth-quarter 2007 guidance, and this guidance assumes fourth-quarter volumes from transportation segment of approximately 2.8 million barrels per day. Our estimated volumes for each of our larger systems are shown on slide 6, and they are generally in line with the volumes for the first nine months of 2007.

Fourth-quarter guidance for our facilities segment is based on an average capacity of 41 million barrels per month of crude oil refined product and LPG storage, 12.9 bcf per month of natural gas storage capacity, and 20,700 barrels per day of LPG processing throughput, for a total of 43.8 million barrels per month.

Fourth-quarter guidance for our marketing segment incorporates lease gathering volumes of approximately 680,000 barrels per day, LPG sales of around 105,000 barrels per day, refined product lines at 15,000 barrels per day, and waterborne foreign crude volumes of 60,000 barrels per day, for an estimated total volume of 860,000 barrels per day. I will point out that we don't expect market conditions to be favorable in the fourth quarter, as Greg alluded to, and in fact we expect them to be less favorable than a typical market.

Maintenance capital expenditures for the quarter were $9.9 million and we expect our full-year 2007 costs to be about $48 million and that's a $4 million decrease on our last estimate. The decrease is primarily due to timing, so the costs will simply carry over into 2008.

Based on our current asset base, we would estimate that annual maintenance capital expenditures will average in the 50 to $55 million per year, but the actual amount incurred in any given year will vary based on a number of factors, including weather, availability of materials, the crude, as well as any mid-course adjustments that we may take once work on a particular asset is undertaken or in response to developments that occur during the year.

But we're still fine-tuning our 2008 planned forecasts, but as a result of the carryover activity from 2007 to 2008, we currently anticipate maintenance capital in 2008 to range from $55 million to $65 million.

We have invested about $392 million on our capital expansion program during the first three quarters of this year and we expect total expansion capital invested over the year to be approximately $540 million.

As shown on slide 7, so far this year we've completed the Cheyenne pipeline at the end of the third quarter. We have an 850,000 barrel expansion at our Martinez terminal, and that will be completed in January 2008. However, most of the facility will be in service by year end. And these tanks are all leased to third parties.

Our 3.4 million barrel Cushing phase 6 project will have about 2.3 million barrels of tankage in service by the end of the year, and the remaining 1.1 million barrels will be in service in early 2008. And the construction of these tanks was supported largely by long-term contracts with third parties.

Our 2.7 million barrel phase 2 expansion at St. James will be placed in service in the early part of 2008 as will our Salt Lake City pipeline project, and our 2.6 million barrel Atoka terminal is on track to be completed in the second half of 2008.

As you can see, we have a number of capital projects coming online in the fourth quarter of 2007 and first half of 2008. And these expansion projects, combined with the acquisitions we completed in 2007 provide a significant portion of the 14% uplift in the midpoint of our baseline guidance for 2008, and in conjunction with our 2008 capital program, will set the stage for further increases in 2009 regardless of the structure of the crude oil market.

And as the operator of the PAA/Vulcan Gas Storage joint venture, we've completed seven of the eight pipeline interconnects to Pine Prairie. And during the fourth quarter, I think we'll be able to begin limited wheeling operations. And wheeling is just the transferring of gas from one carrier to another across our header system.

We are continuing our leaching activities on the first cavern well and we continue to expect to place this cavern into partial service in the first half of 2008. But we also expect to file an application with the FERC for a 16 bcf expansion in the next several months.

And on the acquisition front, we did close the $54 million Tirzah LPG storage facility in the beginning of October. This was a 1.4 million barrel underground granite storage cavern that's been in operation since in 1985. The facility is located in South Carolina and has the ability to receive product from the Dixie Pipeline System.

The Tirzah acquisition is our fourth acquisition this year, bringing our investment in acquisitions to approximately $120 million, so it will be shy of our annual goal to average $203 million --- 200 to $300 million per year in acquisitions. However, as we have stated in the past, we look at this as an average over a two to three-year period. And we believe we can continue to complete an average of 200 to $300 million per year over a two to three-year time horizon. So with that I'll now turn the call over to Phil.

Thanks, Harry. During my portion of the call, I will review our capitalization and liquidity at the end of the third quarter and then walk through fourth-quarter guidance, full-year guidance, as well as the preliminary guidance for next year.

Given all the attention on both the weakness in debt capital markets and the continued sideways trading in the MLP equity capital markets, I'm pleased to report that PAA is well positioned as we ended the third quarter with a strong credit profile, capital structure, and excellent liquidity.

As summarized on slide 8, at September 30th, PAA's long-term debt outstanding was approximately $2.6 billion, while book equity was approximately $3.4 billion; and as a result, our long-term debt to total cap percentage was approximately 43%.

Our third-quarter adjusted EBITDA to interest coverage ratio was approximately 5.1 times. And using the midpoint of our 2007 adjusted EBITDA range, our long-term debt to adjusted EBITDA ratio is approximately 3.3 times. In addition, our long-term debt has an average tenure of approximately 14.1 years and we have no maturities of long-term debt until mid 2009 when we have a small tranche of approximately $175 million maturing.

We also have significant liquidity. As of the end of the third quarter, we had approximately $1.5 billion of undrawn committed capacity on our $1.6 billion revolver that's available to meet our working capital needs; and we are currently in the process of renewing our 364-day $1.2 billion uncommitted contango facility.

As shown on slide 9, even with over $5.4 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 23 of the past 24 quarters.

As we've mentioned in previous calls, the foregoing metrics exclude our short-term debt and contango-related interest costs because our short-term debt primarily reflects borrowings under our contango facility and revolver for hedged crude oil and LPG as well as changed margin requirements.

As expected, due to the change in the market and reduction in contango storage, our short-term debt balance has been reduced from approximately $890 million at June 30th to approximately $480 million on September 30th, reflecting the partial sale of contango inventory and use of the proceeds to pay down the debt. To the extent we remain in a backwardated market, this balance should continue to decrease and should stay well below the peak levels we experienced during periods when the market was in contango.

Slide 10 illustrates the impact of proactively financing our capital needs. With our June equity offering, we're approximately $365 million ahead of our 50% equity and excess cash flow target. That's even after funding our $540 million 2007 capital program and over $120 million in acquisitions that we made to date this year. Further, our long-term debt has remained flat with the beginning of this year and as I mentioned earlier, our short-term debt has decreased by over $500 million.

Our equity compensation expense for the third quarter of 2007 was $1 million, $500,000 of which is reflected in the selected items impacting comparability. This compares to the $9.3 million that was forecast in our quarterly guidance, of which $8 million was included as a selected item. The vast majority of the $8.3 million total difference reflects the cumulative impact of the lower unit price at September 30th on the equity compensation liability accrued during prior service periods.

In addition to the factors Greg discussed earlier that impacted our current period results, I should also point out that our third quarter was impacted by a net P&L charge of $4 million associated with an executive retirement, which is net of previously accrued obligations. One of those obligations was associated with equity compensation that we elected to settle with cash rather than delivery of the units. This payment reduced the accrued equity compensation obligation by $3.9 million. The third-quarter expense associated with this executive's retirement is not included in selected items impacting comparability.

Prior to discussing our guidance, I would mention that those investors that are interested in our gross receipts should visit the gross receipts tab located under the Investor Relations portion of our website. This web page provides an approximation of this quarter's contribution to the annual gross receipts as well as the historical gross receipts per unit.

Yesterday evening, we furnished an 8-K that incorporated actual results for the third quarter and updated our guidance for the fourth quarter of this year. Although there was some movement between the third and fourth quarters from our previous guidance, overall we increased the midpoint of our guidance for the entire year by approximately $7 million. Our 8-K also includes preliminary guidance for the full year of 2008. And since that 8-K is available on our website, I'm only going to touch on the high points of guidance and that's also included on slide 11.

For full year, we expect our adjusted EBITDA to range from approximately $777 million to $797 million or a midpoint of $787 million. And that's for the full year of this year. The midpoint is approximately $97 million higher than the initial guidance we provided for 2007 in our February conference call.

As a result of some shifting between periods, the fourth quarter is now expected to range slightly below our August forecast. Specifically, for the fourth quarter of this year, we guide you to an adjusted EBITDA range of between $165 million and $185 million, or equating to a midpoint of $175 million. We estimate fourth-quarter adjusted net income will range from approximately $78 million to $102 million. That equates to a range of $0.48 to $0.68 per diluted unit.

During the fourth quarter of this year, we expect to realize an approximately $12 million gain from the sale of crude oil line fill. The sale was the result of our periodic reassessment of line fill and working inventory required to operate our pipelines. The projected gain is reflected in other income in our guidance 8-K, but due to the infrequent nature of the gain, we have identified it as a selected item impacting comparability and thus it is excluded from adjusted EBITDA and adjusted net income for the fourth quarter. For additional details and assumptions, again, I refer you to the 8-K that we furnished yesterday evening.

Because of the timing and reduced visibility into the full year of 2008, our preliminary guidance for next year is less precise than our fourth-quarter guidance. We are also still in our formal planning process for next year and will provide more detailed guidance via our 8-K in February at the time of our year-end conference call.

With that said, we currently expect adjusted EBITDA in 2008 to range between 760 million and $810 million with a midpoint of $785 million. Further, we expect 2008 interest expense to be between $167 million to $177 million and 2008 maintenance cap to range between 55 and $60 million.

As Greg mentioned earlier, this forecast reflects the continuation of the current backwardated market conditions for our asset base and business model and is more representative of what we believe to be baseline performance, which corresponds to the forecasts on which we manage our business over the long term and on which we set our distribution growth targets.

And finally, one more item before turning the call back over to Greg. As you may know, Plains GP Holdings L.P. has filed an S-1 for the IPO of PAA's general partner. As the risk factors in PAA's 10-K and the G.P. IPO S-1 document describe, PAA could experience a technical termination under certain circumstances.

Due to a combination of factors, including trading patterns of PAA's units and the structural modifications required to create the IPO entity, we currently believe it is likely that PAA will experience a technical termination for federal tax purposes. Other than for tax purposes, this is a nonevent as the Partnership is deemed to be immediately reconstituted.

Such an event would have no impact on our business or operations but would have some tax impacts, including a reduction in depreciation deductions allocated to unitholders during the first period as a new Partnership. This would result in the tax shield being lower than it otherwise would have been absent the termination. However, unitholders will recoup a portion of the foregone depreciation deductions in subsequent periods due to accelerated depreciation methods.

To the extent that the transaction is consummated in late 2007 as opposed to early 2008, the reduction in depreciation deductions will be minimized. In addition, PAA investors will receive two K-1s for the year in which the transaction is consummated.

The calculation itself is very complicated and requires a look-back test over a trailing 12-month period. Accordingly, we won't know for sure if the termination will be triggered unless and until the actual GP IPO transaction occurs, but we did want to give you a heads-up that it is a likely side effect of the GP IPO.

I would point out that several other MLPs have experienced technical terminations over the past several years and we do not expect this to have any material market impact on PAA. And with that I'll turn the call back over to Greg.

Thanks, Bill. We are clearly pleased with the third-quarter results. Our fourth-quarter guidance reflects the delayed impacts of the crude oil market transition effects, such as contango interest associated with profits realized in the third quarter as well as other market-related impacts of the transition.

Despite some shift of the profits and expenses between quarters, we expect to deliver full-year results in line with, to slightly ahead of, the guidance midpoint we provided on our second-quarter results conference call in August. Although a few months still remain in 2007, we have either achieved or positioned ourselves to achieve each of the five goals we established at the beginning of the year for 2007. These goals and our current status are summarized on slide 12.

We believe PAA is well positioned for the future and we are pleased with the overall increase in baseline operations we're forecasting for 2008. As we noted earlier, the preliminary guidance for 2008 does not include any forecasts for a return of the contango market. Our 7 to 9% annual distribution growth target over the next several years is underpinned primarily by our large portfolio of organic growth projects that we expect to complete from 2008 through 2010.

Before we open the call up for questions, I also wanted to point out that despite recent disruptions in the debt and MLP equity capital markets, we believe PAA is very well positioned to fund its growth. As a result of the PAA disciplined approach to executing its financial growth strategy, we have strong credit metrics, an excellent committed liquidity and we are well positioned to act on attractive expansion and acquisition opportunities.

That wraps up the items on our agenda. We appreciate your continued support of our Partnership and we look forward to discussing our year-end results on our February call.

A complete written transcript of our prepared comments for this call will be posted on our website at www.PAALP.com very shortly. You will also have the option to download an audio version of the call. Jackie, at this time, we can open the call up for questions.

(OPERATOR INSTRUCTIONS). Barrett Blaschke, RBC Capital Markets.

A couple of quick questions. Wondered -- we got into the backwardation a little bit on the call. What does that look like for the storage business? Where are you in terms of how full are the tanks basically? And how does marketing offset?

We generally don't disclose how much oil we have in our tanks for our own account or for our customers. A substantial amount of our tankage is leased to third-party customers. Obviously it doesn't make much economic sense for us to hold crude oil in tanks in a backwardated market.

So when the market slips from contango to backwardation, we generally see an uptick, which was reflected in the third quarter. And our fourth-quarter guidance out there is probably reflective of a worse than normal margin. I think that had about $0.66 a barrel.

So typical -- in a typical market, we would expect probably more than the $0.66 per barrel of our margins from that segment of our business. I know I haven't really answered your question, but --

I didn't ask it very well probably. But I guess what I'm wondering is what kind of downside protection do you have on the storage side on contracts?

Let me break down the tankage. We've got right now, we're building more tanks. Most of it, as Harry pointed out, is under contract. But of the 64 million barrels roughly that we have right now, we only use about 18 to 20% of that for our own purposes at peak during the contango period. So, and about half of the 64 is used for servicing the pipeline side and the other part of it is all subject to leases that range anywhere from some 30 days, but in most cases, it's three to five-year leases.

So we have a fair amount under lease, so it's not as big an impact as you might expect. It's just when it happens it's very positive enough and that's why we've always been talking about the baseline level.

So I would tell you as a result of a combination of factors, increased number of products that have to be handled, which are pushing refiners to find other ways to store their crude because they need more of their on-site tankage for their refined products and the different varieties they have to carry, the increased number and grades of crude and the increased influx of crude coming from Canada, there's quite a bit of demand out there just for fundamental tankage for terminaling and storage activities just to meet day-to-day needs.

So again, it's -- when the contango shows up, it's really affecting a small number of our tanks. It just adds a lot of value when it's there. When you pull that out though, the baseline level is very, very solid.

Okay. Thanks, guys.

Harry Mateer, Lehman Brothers.

Just a question on your credit ratings. You still have a negative outlook at S&P. You've obviously posted some pretty good results here and brought your contango debt down. Could you just discuss a little bit, A, your discussions with the rating agencies with respect to getting that negative outlook back to stable S&P?

And then further down the line, you've spoken previously about your desire to get your credit ratings upgraded. So if you could just update us on that front.

We've got, in addition to Phil Kramer, we also have Al Swanson here, so I will turn it over to them and let them address it.

When S&P put us on negative, they said that the likely time period was a year, of which that year is currently coming up. Just in the normal course we visit with the rating agencies and we agree with you. We would think that that should come off and that the things that S&P asked to see I think that the Company has delivered on since they put us on that watch.

So with respect to our ratings increase target, I mean that's still a target for us out there. We think that given a normal situation, I think we think that we're a mid BBB Company at least. Things haven't been normal and certainly the credit disruptions that occurred in the -- over the summer haven't improved that situation any.

So I don't know if that will impact the rating agencies with respect to us but it certainly can't help them to move forward with a ratings increase. Al, do you have anything that you might want to add?

No.

This is Greg. I would just add that with respect to S&P and again, trying to predict what rating agencies are going to do is maybe more difficult than trying to predict oil prices and market structure. But they did have a one-year period; November 15 will be that one-year period. We have turned in very strong results.

Candidly, I think the fact that we went from a contango market structure to a backward and that our numbers are not only resilient, but they're basically above where the forecasted baseline would have been in the absence of that market chatter, we think should and could turn into a positive.

I think the fact that the debt has come down as we said it would and been self liquidating, we've raised more equity. It should all bode well for absolutely reinforcement of our current rating. And we believe, as Phil said, hopefully pushing them in the right direction to see us continue to go up.

We do have a target of being a mid to high BBB. We think the credit statistics that we have support that already.

And, quite, again, the fact that the market has reversed from contango to backwardation, we think will give people a chance to see the full cycle benefit of our asset base and our business model and that you shouldn't treat the contango numbers as if they are evil when they show up. They're actually incremental profits that go to fund capital and when you peel them out, we've got an extremely strong capital structure.

Great. Thanks, guys.

John Edwards, Morgan Keegan Company.

Good morning, everybody. Can you hear me? In the past, you've talked about I think it was about $1.2 billion of capital expansion project opportunities over the next three years. I was wondering if you could confirm if that is still the case and maybe provide a little detail on specifics as far as when -- how you think those will hit.

I can. The first answer to your first question is it's still our belief that we have those absolutely. As far as giving you a little bit of color, two things to caveat with and then I will answer your question.

We're still developing our 2008 capital program. And for competitive reasons, we are somewhat cautious about being too specific. But having said that, we can reconcile about half of the $1 billion to $1.2 billion that you reference simply by identifying that -- we think already, based upon where we are in our capital program for 2008, that we've got probably 250 to $300 million of projects that we'll be implementing in 2008. And, again, it's somewhere in that range. We're still developing that and we will certainly give guidance in February as Phil mentioned.

None of those projects I think individually account for more than 25 to 30% of that total. So again, you are talking about a good spread, good diversification without a whole lot of high concentration risk in any one.

What's not included in that number is Pier 400, which is subject to regulatory approval, but as soon as we get that -- and we believe that that is more of a when not an if -- that's going to add about 350 to $400 million, somewhere in that range, depending upon what we spend in preliminary engineering design by the time that that approves. So that, alone, accounts for an order of magnitude of half to 60% of that $1 million (sic) to $1.2 billion range.

And the balance is our projects, again, we have identified; they are in various stages of development and negotiations with our customers as to the types of infrastructure that they are willing to give us commitments to support or our assessment of the market conditions that would cause us to build those irrespective of commitments.

But we don't want to be too specific because we're not the only guys out there trying to come up with great ways to build assets and generate returns. Does that --?

Yes, that helps and just one follow-on to that is -- has the shift to a backwardated oil market impacted -- how has that impacted your capital expansion plans?

It hasn't. Zero.

Zero? Okay. All right. Thank you very much.

And John, I would point out too that back to Barrett's question earlier, of the roughly 12 to 14 million barrels that we have used for contango purposes, for 2008, while not as attractive levels as we realized when we use them for proprietary, we basically got them either under leases or synthetic leases with market position.

So again, I think we are actually looking forward to looking back at the end of 2008 and looking forward toward 2009 to give people a report card on showing what our assets and our business model can do through the other leg of the cycle.

Okay, great. Thanks a lot.

Ross Payne, Wachovia Securities.

First question, the Capline seems to have been up nicely; if you can just kind of give us a little color on what was driving that 26% year-over-year increase.

A couple things have helped Capline. First of all, remember when hurricanes occurred in 2005, it took some of the Gulf of Mexico production out. So as those platforms have come back online and (inaudible) into south Louisiana, St. James area, so that has helped Capline.

We signed an agreement last year with one of the refiners on the Capline system and they've continually increased volumes over and above their base level commitment to us. So that's what's -- those are the two factors that have primarily driven the increased Capline volumes.

Okay. Also, on the distribution coverage, where did you guys end the quarter and what's kind of a range you're looking for over the next 12 months?

Ross, we've been running very high coverage as a result of the contango contribution that we've always, again, said we don't really base our guidance on that. But the coverage for the year for -- based upon the midpoint of our guidance will come in right at about 120%. The guidance mid to high range for the fourth quarter is in the 95 to 104 range, so call it about flat. And then if you just look out at the midpoint of our 2008 over the current distribution it's running at about 110.

Okay.

As far as -- as we look forward. Again, we're always going to filter out the market chatter associated with profits that we cannot reliably forecast will occur. As the Wall Street Journal quoted, we're not going to throw it in the trash just because it's not repeatable, but we're going to use it to defray costs on our capital programs or defray having to issue equity on that.

But I would tell you again we've always said that we're comfortable somewhere in the 105 to 112 range. 110 has been one that we have probably quoted a few times, and we believe with the reliability and the predictability of our base level operations, that's a very comfortable level.

Okay. One final question. You've obviously got a lot of growth CapEx currently underway. Can we think about certain kind of EBITDA multiples associated with that CapEx to kind of build in some pro forma EBITDA on money that's already been spent out the door? That's kind of one way we can look at leverage a little differently as well. But can you give us kind of a range of multiples in terms of some of the organic projects you are doing?

I'll give you a range and I'll give you kind of what I think you ought to use for a weighted average. But first off, with respect to the guidance we're providing, clearly part of the uplift from the base level $690 million that we entered into 2007 versus the midpoint of our guidance at $785 million reflects the benefit of the capital spend or at least part of it.

As Harry pointed out, some of those projects are going to come on in the fourth quarter of this year. Some are coming on throughout the first half of next year and then you've got some that carry over into late '08, early '09. So trying to use a formula of capital spent in a year divided by a multiple equals adds to the next year is a little bit tricky depending on whether we're talking about a six-month project or an 18-month project.

The range of multiples, if you will, on the capital projects, it can vary from some of our best ones look like a 2 or a 3 and some of our less high returns can be as high as a 9, probably somewhere in the 6 to 7.5, 6.75, 7 number is a comfortable range that won't get you in trouble.

Over time, we think that with value added from our marketing activities, we can maybe push that to a little bit lower then what I would guide you to. But I would say you are safe in that 6.75 to 7 range.

Very good. Thank you very much.

[Gil] Alexander, [Darsel Associates].

Good morning. Could you give us some perspective on how much of savings is still to come from the Pacific acquisition?

You mean by savings, basic synergies?

Yes, sir.

Yes, because our synergies came from some cost savings that were immediate, some over time, and then some commercial and then some capital, where we plumbed some of their assets into ours.

Initially we targeted $30 million for the first year and I think we had a projection that by 2010 that number climbed up to $54 million. And our belief is we're probably running higher than that. Part of the uplift that I mentioned in the baseline forecast was associated with increased synergies. We've certainly hit our target plus some, and I hope S&P is listening to that.

But we're finding additional values in here to be able to extract value, so I think we're still going to be harvesting synergies for some time to come. Overall, order of magnitude, it is probably going to be in the 15 to $25 million above where we forecast. Some of -- again, that does not all come at once because it takes a while to phase it in.

As I mentioned on the prior phone call or the one before it, what we did find when we got into Pacific, there were probably some near, shorter-term headaches that we had to handle. We had budgeted for those. We just didn't know exactly what they would look like. We're pretty much through most of that right now and ultimately, that -- shorter-term headaches generally means there's more long-term upside and that is what we're finding as we speak. Harry, do you agree with that?

I do. You can look at the $1.2 billion of CapEx that we're looking at over the next several years also; a fair amount of that is coming from new opportunities associated with the Pacific assets as well.

Thank you.

Yves Siegel, Wachovia Securities.

Thanks. Good morning. First question is, you spoke about the movement from contango to backwardation. Is there a profit opportunity just because you have had a step change in the absolute value of crude?

No, not really. Some of our -- and Harry mentioned it in his comments -- part of our tariff structure on the pipeline side is we get a fraction of a percentage of the crude oil to be retained to compensate for fuel. And so when there's an immediate spike in the price of crude, we have some ability to capture that, but we're not talking about huge volumes.

What offsets that even, and we view it as a natural hedge, is clearly the costs of our utilities go up as well. And so we try to manage both sides of that equation or let it float, depending upon our view on the market. So there's not really a direct impact.

Our margins aren't really affected by the absolute move in prices. If they were to fall extremely low, theoretically you start to lose volume from a producer. But that's kind of a self-fulfilling issue because as soon as you drop it low then all of a sudden demand goes up and vice versa on the upside. Theoretically you'd see a lot of explosion in drilling activity and we're seeing some pickup in certain areas because of the high oil prices. But the bottom line, we've been -- most of our producers have been trying to run flat out as soon as it cleared $40 a barrel anyway.

Okay. And then a couple more would be looking forward at the potential projects that you have on the slate, would you -- did the return potential there -- is it pretty much in the fairway that you answered Ross's question? Is it better or worse or pretty much in the fairway?

And then the second part of that would be is it possible to sort of look at that project slate and give us sort of average duration of how long those projects may take to come to fruition, come to the finish line?

The first part of your question will be a little bit easier than the last part. Yes, the rate of returns really haven't moved a lot with the gyration in the market. Would you say, Harry? I mean they've been --?

They've been pretty steady, yes.

They're in the 13 to 17% range, and if you average around 14%, that gets you back to about your 7 multiple. These are very, very long-lived assets even though for accounting purposes we are somewhat forced to amortize our tanks over 40 years, even though they will be here when my kids' kids' kids' graduate, such is life.

So when we do our rate of return though, we actually look at the useful life of the asset. But when you get beyond 100 years, it doesn't contribute much to the rate of return. Having said that, it's somewhat of an annuity.

The life of the projects vary by the mix. And I would probably tell you that whereas five years ago, the duration from implementation of the projects to realization of cash flow may have been in the six months to a year, we've probably migrated on out probably, Harry, into the 12 to 18 to 24-month range?

Yes, I would say the bulk of them are 12 to 18 months. There are a few that run out over to 24 months.

For instance, to build tanks in Cushing like we do, I know we started early last year. We'll have most of them in position early this year, this coming year. And so it's in that 12 to 18-month range. So it's moved out some, but it's probably moved by a factor of six months on average.

And then the last question relates to, given the dislocation that we saw in the credit markets earlier, number one, and number two, given the absolute level of commodity prices and the fairly high cost of infrastructure projects, and then looking north to Canada in terms of what's going on there, has the opportunity set changed a whole lot for acquisitions?

I would say it's in transition. I think clearly the sellers had figured out that when capital was available to everybody at very cheap, very low levels and there were hardly any entry barriers to becoming an MLP, they could extract a lot of the value associated with that decline in the cost of capital.

We have participated in certainly a number of acquisition efforts and walked away from them, been told we didn't make the cut because our numbers weren't high enough to even make the first round, because we just fundamentally didn't see it the same way. And while we view returns relative to our cost of capital, we also believe there is a full cycle issue there that you can't get carried away and drunk on the Kool-Aid of low interest rates that may not be there forever.

We are hearing back from some of those processes that they haven't closed yet or that sellers are rethinking, but we haven't closed a whole lot of deals either since then. So I would say we're in transition.

I think we won't know probably until the middle of next year just whether this is a pause and then it's going to take off again or whether it's actually going to cause a recalibration of the sellers' numbers and we'll see the multiples come down.

From our perspective, that's the best of all worlds. Our balance sheet is strong. Our growth strategy, financial growth strategy is always to pre-fund and be ahead of it. So we would actually want to judiciously guard our capital and invest it at the best rates of return.

The fact that we have a fundamental business model that allows us to add synergies to assets should give us an ability to probably get some outsized returns if we do that and execute well. But it does require that the market not pause but that it actually transitions to a lower level. That doesn't mean we can't make good investments; it just means we like to make great investments.

Is Canada a viable option to expand?

We are expanding there. In fact, we're still doing our capital budget, but there's a lot of projects up there. There's just a lot of demand for infrastructure to help move and the displacement of crews. Once a new particular crew comes on, it causes a rotation in other areas. It certainly affects the Rockies quite a bit.

And as far as -- you're talking about acquisitions. The only thing I can tell you is the Canadian capital markets were affected about a year ago the day before yesterday by the change in the income trust tax laws. They have since recovered.

And while the MLP capital structure or capital supply had disruptions that occurred in early August, you haven't seen that north of the border because I think most of the capital had already migrated down south back a year ago. So I think that's going to require settling out too.

Right now I don't think there are any screaming bargains up there, but I think over time it can and should settle out. And then of course you have to factor into that, too, the fact that the Canadian dollar has gone from a 1.55 ratio seven or eight years ago when we first entered Canada now to 0.95.

So we're doing very well with our investments that we have as our Canadian friends up there remind us. But we have to watch and make sure that our rate of returns take into effect the currency exchange issues too.

Thank you.

Xin Liu, J.P. Morgan.

I have two questions regarding the GP IPO. Who are the selling shareholders of GP?

My second question is you mentioned the tax shield would be lower. Can you comment on by how much?

On the first issue, the selling unitholders, the GP, we anticipate will be almost across the board. There are still some discussions going on. I think all of our owners would like to have a public mark out there, but they would like everybody else to sell it. There has to be enough willing sellers to do a minimum sized deal, so. But we think it will be fairly uniform across. There may be a few holders that choose not to sell.

As far as the tax shield, it's fairly complex and we're still calculating it. The last time we calculated, I think at the time people would buy in the public market I think we were looking for shields in around the 70 to 80% range. And once we get through the transition period, that would probably be back in the neighborhood of --- where is that? Pat, do you want to --?

The one thing I would add to that is -- this is Pat Diamond. The other thing that I would add to that is that during 2007 and 2006, our unitholders have probably experienced lower shields than they ordinarily would have anyway based on the fact that we've generated excess cash flow and net income based off the contango market. So their shields based on historical levels have probably come down as a result of that excess performance because that excess performance has not been distributed out. As Greg pointed out, we use that excess to fund projects.

So as we look to 2008 with no real contango baked into our forecast, you may actually get an offset because that excess is not there. And you may not notice that big a difference, but as Greg pointed out, it is a complicated calculation. At this point, we don't really know precisely what it's going to turn out to be.

And another question regarding your 2008 guidance. How much CapEx spending have you baked in for 2008 in that guidance?

We're still developing the capital program there, but very little of the capital that will be spent in 2008 will have any significant impact on the EBITDA guidance that we gave. So I don't expect that to move a lot as a result of our capital program. If anything it will affect 2009 and 2010.

But the neighborhood, if you will, of capital that we expect is probably around the 250 to $300 million range as we sit here today. And, again, we're still trying to finalize that. But that would not include --- we are anticipating a Pier 400 approval. If that happens then that number could move up a little bit. But again that's going to affect outer years, not 2008 EBITDA performance.

So the year-over-year increase is mainly from -- primarily from the 2007 spending?

Correct. And the additional synergies from Pacific that we're realizing.

And then I would also -- I failed to say this earlier, but it was on one of Phil's slides, we have effectively prefunded enough equity -- our approach is to fund our capital expansion 50-50 debt and equity. And we have already raised sufficient equity to prefund certainly a capital program for 2008 in an order of magnitude of the 250 to $300 million range, without needing to go back to the equity capital market, and still have excess left over for further capital expansion or for acquisitions.

Thank you.

(OPERATOR INSTRUCTIONS). Sam Arnold, Credit Suisse.

Just two things. The first would be, Greg, could you talk about, with crude oil prices where they are at, are you seeing an increase in drilling activity in your gathering areas?

And then the second question would be, given that with the Marathon announcement on Detroit and with Wood River, BP at Whiting and some of these other guys converting to Canadian heavy, can you try to quantify the impact that you can see on Capline and Capwood volumes?

Yes, I'll take the first one. We have -- as crude oil has trended up from -- it hit I think at the beginning of this year, it probably got as low as what? $50, $55 and has moved on up. It's been fairly active drilling in many of our areas in West Texas, as there is a predominance of oil out there.

While you've heard people, a fall-off in onshore drilling rig activity, it's primarily been gas because we're certainly seeing very active producers where we are at. It's a little bit early, Sam, to predict what 90, $94 oil is going to do, but I'm not so sure that -- just because the price went up, I don't think there's that many projects that have been waiting for that high price to be active.

So I think we're probably seeing a high level of activity in our areas already. And I think, quite candidly, it could go down to $30 or $40 and we would still see a continuation of that. So I don't think there's really a price related influence associated with the last price move. Would you agree with that, Harry?

I would, yes.

And you want to address --?

Yes, as far as Capline is concerned, when you look at the two entities that you just mentioned, Marathon and BP, they each have their own interest in Capline. So their volume fluctuations don't affect our interest in Capline at all. It's like we all have our own small pipes within the Capline pipeline system.

Oh, okay, oh. I see, it's not just collective? It's the 22% that they -- it would only affect their volumes, not 22 --?

We have our own share of space. As Harry said, we own 22% of the Capline, which gives us about 250,000 barrels a day of capacity. And we can track for and receive all the benefit of that capacity. We all share operating expenses proportionately.

Got you. Okay. All right, no, that's good. Thanks.

There are no further questions at this time. I would like to hand the floor back over to management for any closing comments.

Thank you, Jackie. Thanks to everybody for attending and again, for your continued support of the Partnership and we do, indeed, look forward to updating you in February with additional results for the fourth quarter and more defined guidance for 2008. Thank you.

This does conclude today's teleconference. Thank you for your participation.