Plains All American Pipeline LP (PAA) 2008 Q2 法說會逐字稿

Welcome to Plains All American Pipeline's second quarter 2008 results conference call. During today's call, the participants will provide forward-looking comments on the partnership's outlook as well as a review of results of the prior period. Accordingly, in doing so, they will use words such as believe, estimate, expect, anticipate, et cetera. 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 their website at www.paalp.com, in particular the section entitled non-GAAP reconciliation, which represents certain commonly used non-GAAP financial measures, such as EBITDA and EBIT, which may be used here today in 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 comparably 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 measures excluding the effect of selected items impacting comparability. Today's conference call will be chaired by Greg 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 Al Swanson, Plains All American's Senior Vice President, Finance. I will now turn the call over to Mr. Greg Armstrong.

Thank you, operator. And good morning to everyone. Before we get started, as mentioned by the operator, Al Swanson will be taking part in the conference call today, as Phil Kramer, our CFO had a close relative pass away earlier this week. Plain's All American turned in a strong second quarter. Before we get into details of the quarter, I want to make a few brief comments on the environment, recent events and PA's positioning. In our February 14th conference call, we shared our views on the unstable economy and uncertain financial markets and discussed the steps we were taking to best position PAA to withstand the adverse effects of these conditions, capitalize on opportunities and continue to deliver an attractive total return proposition to our investors. Unfortunately the economy has indeed weakened and financial markets have deteriorated.

Fortunately, as a result of our continued focus on fundamentals, execution of our proven business model and strict adherence to our long-standing financial growth strategy , PAA is in an attractive position during these uncertain times. In the midst of these challenging conditions, we have completed a sizeable, strategic and accretive acquisition in the Rainbow Pipe Line and delivered solid operating financial results while at the same time maintaining a strong balance sheet and significant liquidity. In addition, in a transaction that closed earlier this morning, Occidental Petroleum, the fourth largest energy company by market capitalization will become a 10% -- or has become a 10% owner and our general partner. This transaction further strengthens our existing group of strong general partner owners, and we look forward to exploring potential win-win business opportunities with Oxy. These volatile and unstable market conditions have had an adverse impact on several MLPs. Late in the week of July 14th, there were rumors, information and misinformation in the market regarding another MLP and the possible impacts of that MLP's situation on PAA. We received a significant number of calls regarding PAA as well as the other MLP. Our policy is not to comment on market rumors or unusual trading in our units, and that remains our policy. However, policies are seldom perfect, and it appeared to us that in this particular circumstance, it warranted a deviation from the policy.

Accordingly on July 17th, we issued a detailed press release to get the facts out about PAA. I will not repeat that statement today as the press release is available to all to review, but I would note that the vast majority of the information contained in the statement was reinforced by the quarterly information we released yesterday. Neither PAA nor our industry peers or competitors can control or predict the economy, the energy markets or the financial markets. However, at PAA we are constantly challenging ourself to use foresight and scenario planning to identify potential developments, assess their probability of occurrence and perform cost benefit analyses with respect to the cost of preparing for such developments as well as the opportunities that such circumstances could present . If given the opportunity to do it over again, I'm sure there are some things we would have done differently over the last 7 months, but overall we are pleased with our current position with respect to earnings capacity, financial liquidity and distribution coverage. We also believe we have the opportunity to evaluate and should be in a position to compete for several potentially attractive acquisition opportunities over the next 18 months. By the end of the the today's call, I believe we will have demonstrated that we are comfortable with the guidance of distribution growth targets we have shared publicly, that we are confident in our financial position and the soundness of our business model and that we remain passionate about continuing to build PAA.

With that introduction, let me briefly comment on PAA's financial results before turning the call over to Harry to discuss our operating and capital and acquisition activities. Yesterday Plain's All American reported solid operating and financial result s for the second quarter of 2008. The partnership exceeded the midpoint of its increased May 29th guidance by -- for adjusted EBITDA by 15% and exceeded the mid point of original second quarter guidance by 27%. All three segments delivered strong results with each coming in at the upper end of the guidance range. As summarized on slide three, adjusted EBITDA totaled $238 million and adjusted net income for the quarter was $132 million or $0.86 per diluted unit. These results were generated in a somewhat transitional crude oil market. Even though there was significant volatility in absolute crude oil prices throughout the quarter, the market structure, which is more relevant to our performance, was generally range bound between $0.50 per barrel (inaudible) and $0.50 cent per barrel contango. Given the increase in commodity prices, I think it's worth pointing out that the overall contango necessary to generate attractive inventory storage opportunities has increased considerably as well.

As shown on slide four, we have delivered performance in line with our public guidance consistently since we began providing detailed guidance in 2002. As the bottom half of this slide illustrates, the market conditions that existed over that period have a varied wildly with respect to absolute crude oil price volatility, market structure and basis differentials. Accordingly we believe the comparisons provided by these graphs highlight the merits of our business model and the strategic role, diversity and value of our assets in the industry. Our assets and business model not only help to insulate us from the dramatic fluctuations seen on these charts, but also provide us with upside opportunities in certain markets and solid visibility into our operating results in almost any market environment. I would note that included in our second quarter results is a net benefit of approximately $20 million attributable to a number of factors including the sale of excess working inventory. Since this net benefit was generated in the normal course of our business, we have not identified it as a selected item impacting comparability. However, much like the benefit realized from favorable market conditions , these types of opportunities are challenging to forecast, and we have not included such performance in our guidance for the remainder of 2008.

The last several months have been an extremely active and productive period for PAA. In addition to exceeding guidance and closing the Rainbow acquisition, we raised approximately $915 million of long-term capital in a combination of equity and debt capital market transactions. This additional capital enabled us to permanently finance the acquisition of Rainbow, further enhance our strong liquidity levels and position the partnership to capitalize on further strategic opportunities. As a result of solid first-half performance, recalibrating our base line performance and adjusting for the Rainbow acquisition, we have increased our 2008 guidance by 13% over our original 2008 guidance and increased our targeted distribution growth goal for the year to an annualized range for our November distribution of $3.61 to $3.66 per unit. All in all we are well on our way towards achieving or exceeding the goals we set forth at the beginning of the year and positioning PAA to have another year of attractive growth in 2009. With that I will turn the call over to Harry.

Thanks, Greg.. During my portion of the call, I'll review our second quarter operating results compared to the mid point of our guidance issued on May 29th, 2008, discuss the operational assumptions used to generate our third quarter guidance and update our progress on our expansion projects. As shown on slide five, adjusted segment profit for our transportation segment was $114 million or $0.41 per barrel, which compares favorably to the guidance mid point of $101 million or $0.38 a barrel. The positive results relative to our guidance were due to a combination of higher than forecasted volumes in our crude oil pipelines and lower than forecasted operating expenses. Pipeline volumes both for refined product and crude oil were 118,000 barrels per day higher than forecasted. Volumes on our west Texas/New Mexico system, the cap line system and the basin system accounted for 42,000 per day, 22,000 barrels a day, and 17,000 barrels per day respectively at the volume variances. The west Texas/New Mexico system favorable volume variances were split about evenly between our gathering system assets and the mesa pipeline system, more like a main-line system. Starting next quarter, the mesa system volumes will not be included with our gathering system volumes.

Operating expenses for the transportation segment were lower than we estimated. However total operating expenses for all three segments were in line with the amount reflected in our guidance . Adjusted segment profit for the facilities segment was $38 million, which was slightly higher than the guidance midpoint of $36 million primarily due to increased processing fees at our Shackford facility. I'd like the point out that effective with the June 30th reporting period, both financial reporting and for guidance, we began reporting shelf capacity for all tankage available for service. This is the primary cause for the 7 million barrel variance between our reported shell volumes of 58 million barrels and guidance of 51 million barrels per month. This reporting adjustment is also the reason why our adjusted segment profit barrel metric of $0.23 is lower than the guidance of $0.24 per barrel. Adjusted segment profit for the marketing segment was $85 million or $1.09 per barrel, which compares favorably to the guidance midpoint of $71 million and $0.93 per barrel. Marketing volumes were 849,00 barrels per day compared to 835,00 barrels a day in guidance. Positive volume variance was attributable to higher than forecasted foreign foreign volumes, partially offset by slightly lower than forecasted crude oil lease and LPG volumes. Favorable results relative to our guidance were due to a combination of, one, increased foreign volumes, secondly, higher than forecasted margins in our lease gathering business due to structures of the market, and then, thirdly, higher than forecasted margins in our LPG business.

Slide six shows how our second quarter adjusted segment profit per barrel metrics compare to prior periods. As you can see from the chart, our base-line performance with respect to transportation and facilities generates consistent metrics, with notable variations from the historical baseline typically attributable to acquisitions or new assets being placed in service. Acquisitions or newly constructed assets can result in step changes either up or down, depending upon the per unit profitability of the new assets relative to the existing portfolio. In this quarter, the addition of the Rainbow pipeline system in May accounted for $0.01 per barrel increase in the second quarter's transportation segment profits. In the third quarter, it's forecasted to increase the transportation segment profit by $0.05 per barrel. Unit margins in our marketing segment fluctuate a bit and reflect a variation in market structure and our ability to benefit from favorable market conditions. The slide also illustrates there is a base level of margin that is realized in almost any type of market.

Maintenance capital expenditures were $17 million for the second quarter. We are forecasting these expenditures to be approximately $70 million for the full year. The $10 million increase from our original guidance is due to the fact that we believe we'll be able to get more of our API 653 work done this year than originally anticipated. That's primarily due to market conditions. If you'll recall from prior-year calls, we deferred some of our API 653 work due to the strong contango market conditions. On a going-forward basis we're still comfortable with the annual average maintenance CapEx of around $60 million per year . Let me now go over the operational assumptions used to generate our guidance for the third quarter, which was furnished to our form 8-K issued last night and as shown on slide seven. For all three segments, references to segment profit excludes selected items impacting comparability. For the transportation segment, we expect volumes of approximately 3 million barrels per day. This is in line with second quarter volumes. However it's comprised of an increase for the full quarter ownership of the Rainbow pipeline system, offset by some forecasted decreases on a handful of pipelines, particularly the mesa pipeline which is included in our west Texas/New Mexico system, and to a lesser extent, the basin pipeline system.

Facilities segment guidance is based on forecasted volumes of 55 million barrels per month of crude oil, refined products and LPG storage, 13 BCF per month of natural gas storage and an average of 20,000 barrels per day of LPG processing throughput volumes for a total of 58 billion barrels of capacity per month. These models are in line with the volumes in the second quarter. Marketing segment guidance includes forecasted lease gathering volumes of approximately 690,000 barrels per day, LPG sales of 75,000 barrels per day, which reflect a seasonal increase of approximately 24,000 barrels per day over second quarter volumes, refined product sales of 27,000 barrels per day and water-borne foreign cargo volumes of 75,000 barrels a day. This is a little lower than the second quarter volume of 102,000 barrels per day, but it's in line with our historical volumes. For some of these volumes, the yields total volumes for the marketing segment of 867,000 barrels per day. While there's been a contango market in the first part of the third quarter, our forecast does not assume that the contango gets wide enough, given the high price of crude oil, to support any meaningful contribution to our results for the second half of the year.

Our guidance includes the impact of additional volumes that we 're gathering as a result of the SemGroup bankruptcy filing. We estimate that we've added about 15,000 to 20,000 barrels per day of lease gathered crude oil. We've negotiated transportation arrangements with Syncrude to the extent we are using Syncrude assets. In addition, guidance includes the impact of the Mississippi river closing during the latter part of July which had a minimal impact to us. And now let's move on to our capital projects. We recently placed 450,000 barrels of our Fort Laramie area tankage into service. The last 150,000 barrels of this tankage is on schedule to be completed early in the fourth quarter. We're on schedule to place approximately 2.6 million barrels of Patoka phase one tankage into service around the end of the third quarter . I'd note that our Patoka tankage will be in service before the new Canadian pipelines in Patoka are in service. Accordingly we don't expect full utilization of this facility until the second quarter of next year. At West Hinds, we expect to have our 600,000 barrels of new capacity in service by the end of the year and at Paulsboro we expect to place 450,000 barrels of tankage into service by year end with the remaining 550,000 barrels of tankage coming into service during the first quarter of 2009.

In Canada, our modification to our (inaudible) terminal are underway and are expected to be completed and in service by mid 2009 and our Rangeland related projects are on schedule to be completed and by mid year 2009. The Rangeland projects include the reversal of the (inaudible) pipeline system and the construction of 320,000 barrels of storage capacity at Edmonton. We have two new Canadian projects that are associated with the Rainbow acquisition . They are terminals at Westlock and [Nipasea]. Capital expenditures for these two projects are estimated to be $20 million, of which approximately $11 million has been added to our 2008 capital program . The Westlock facility is expected to be in service by the end of 2008, and the Nipasea facility is expected to be in service by mid year 2009. We have a couple little projects associated with Rainbow acquisition, but we're too early in the process to discuss any of the details.

On the Salt Lake City pipeline expansion, we expect to have the pipeline in service by the fourth quarter this year. We've had significant cost increases and timing delays with this project. Most recently, difficulties in completing horizontal drills in certain areas, particularly in the Weber Canyon area that have caused these cost increases. The total cost to PAA is expected to be approximately $185 million, approximately $50 million higher than our previous estimate. As unfortunate as it is to have cost overruns or delays, the example does reinforce the benefits of PAA's diversified expansion capital program and the cost -- as the cost increases and delays of this project will not impact our distribution growth targets. In the Rockies, we announced an open season for the crude oil transportation service from Fort Laramie to Cushing a couple months ago, but service would have been based on an extension of one of our pipelines with joint tariff with the SemGroup entities. Based on the combination of complexities resulting from the SemGroup bankruptcy and the lack of producer shipper support for the project, it's been delayed for the time being. We do plan to go forward for our Wamsutter reversal that was recently announced. This is a relatively small project that will provide the opportunity to move crude oil from the Wamsutter area in Wyoming to Fort Laramie.

On May 28th, the much awaited draft environmental impact report and draft environmental impact statement was released by Port of Los Angeles and the U.S. Army Corps of Engineers and the public comment process is underway. The release of this information is clearly a positive step in the right direction, and the draft reports also include some latitude for increased throughput capacity versus our base-line forecast. It's important to note that these types of projects undergo a tremendous amount of scrutiny in California. Although we are pleased with the level of cooperation we are receiving from the various constituencies there, we are not in control of the approval process and there is no guarantee that such approvals will be obtained or what timetable that they'll be obtained. It is also worth noting that steel prices are almost double the average we experienced in 2007 and have increased around 40% over the last 7 months. Like everyone else in the industry, we've also experienced general inflation of other related materials and services. Assuming that the regulatory process continues to move along, we are working to update our cost estimates and time schedule and will have discussions with our customers. With those thoughts in mind, I'd urge everyone to be cautious about modeling a specific start date for Pier 400, and would highlight that our publicly stated distribution growth targets for the next several years are not dependent on Pier 409 coming online prior to 2011. We believe our inventory of expansion projects will continue to grow over the next few years sufficient to replace the anticipated impact of Pier 400 if we're ultimately not able to develop it.

As shown on slide eight, we have increased our aggregate 2008 expansion capital program by $40 million to a total of $460 million. This increase is the result of various midyear adjustments including the increases in the Salt Lake City pipeline, the Rainbow pipeline project, the minor adjustments to the Pier 400 project, as well as some reductions in current year -- in the current year for minor timing related delays for a few of our capital projects. In addition to the $460 million of 208 expansion capital, progress is being made in our PAA (inaudible) storage project. We have completed the mechanical integrity testing of cabin well one and expect to place approximately 5 BCF of the storage capacity associated with this cavern in service in September. We continue the leaching operations on cabin well two, which should result in approximately 6.5 BCFs of additional storage capacity being placed into service next year. Slide nine shows the expected timing of some of our major expansion projects. The key take-away from this slide is that much of capital that we are spending in 2008 will provide for cash flow growth in future periods as these multi-year projects are placed into service. And then finally on the acquisition front, we closed the Rainbow transaction in May and have integrated the physical operations of Rainbow into our activities. Tariff changes were implemented effective July 1st, 2008, and we're in the process of moving the (inaudible) system do our control center. As previously discussed, we're progressing on capital projects related to this acquisition, and we are proceeding as planned on the realization of identified synergies. And in general, our acquisition activity remains high. With that I'll turn it over to Al.

Thanks, Harry. During my portion of the call I will discuss our capitalization, liquidity, recent financing activities and guidance for the third quarter of 2008. As summarized on slide ten, we ended the second quarter of 2008 with strong capitalization and liquidity, and we're also within our targeted credit metrics. As of June 30, our long-term debt do capitalization metric was 47%, which is favorably below our target of 50%. Our second quarter adjusted EBITDA to interest coverage multiple was 4.9 times, and utilizing the mid point of our second half 2008 adjusted EBITDA guidance, and we're doing this to reflect the contributions of Rainbow acquisition, our long-term debt to adjusted EBITDA ratio is 3.5 times. As noted in prior calls, contango related interest costs are excluded from the interest coverage multiple, as that interest is reflected in gross margin as a direct cost of the storage transaction. In mid-May, we completed a $315 million overnight marketed equity offering, which including the underwriter's overallotment options, resulted in the sale of $6.9 million limited partner units . The offering was priced at an all-in discount of 5.5% to our closing price the day of launch, which compares favorably to our other recent MLP equity offerings. The vast majority of this offering was sold to the retail markets and was well received in the market. As a result of this equity offering and our $600 million offering of senior notes in April, we have completed the permanent financing for the Rainbow acquisition and our 2008 capital program and further improved our overall liquidity. As a result, we are well positioned for potential future acquisition opportunities.

Before moving on to our short-term debt position, I want to take a -- make a quick comment about equity financing. PAA has always been proactive when it comes to raising equity capital to support our growth. In some instances we have raised equity capital well in advance of the actual need for the equity, which is typically required for an acquisition or expansion capital program. In the interim period we pay down debt, either short-term or long-term depending on the composition of our debt structure at that time. Clearly, there is an incremental cost to PAA of pre-financing in this manner. Certainly it is possible that if we were to wait until the actual time we needed the we equity, we may be able to sell the units at a higher price. However, we believe and our experienced reinforces that in most cases pre-funding the equity when it is available, even if it may be at a lower price, is more advantageous to our stakeholders than waiting until we absolutely need the equity. It enables us to maintain higher levels of liquidity, which is of even greater importance given the current credit environment and in light of recent industry events, yet it also positions PAA to be opportunistic with regard to acquisition and investment opportunities, particularly if other industry participants may be experiencing challenges. For this reason, you will continue to see PAA take a prudent approach to pre-funding, which we believe will continue to pay dividends for our stakeholders over the long term.

Shifting back to capitalization, our short-term debt balance at June 30, 2008 -- and this represents borrowings to support our hedge, crude oil and LPG inventory as well as our NYMEX and ICE margin requirements was approximately $720 million. Our LPG business has a seasonal inventory storage aspect to it, and our hedged crude oil inventory at June 30 was primarily associated with our foreign crude oil activities which can require temporary storage and this activity is not necessarily dependent on contango market economics. At June 30, we had nearly $2 billion of liquidity including approximately $1.2 billion under our committed revolver and approximately $780 million under our uncommitted hedged inventory facility. As Greg mentioned in his introductory comments, yesterday we furnished guidance for the third quarter in a form 8-K. As shown on slide 11, we expect third quarter adjusted EBITDA to range from $205 million to $225 million with adjusted net income ranging from $94 million to $119 million or $0.51 to $0.70 per diluted unit . Also represented on the bottom of slide 11 is our full-year 2008 guidance, which represents a 13% increase in adjusted EBITDA over our original 2008 adjusted EBITDA guidance. As shown on slide 12, this increase in our 2008 guidance continues our trend of delivering adjusted EBITDA results above our beginning of the year guidance .

I would point out that in addition the EBITDA provided by the Rainbow acquisition, a significant amount of this year's projected overperformance is attributable to increases in our base-line performance , which further reinforces the value if our asset base and business model even in less than ideal market conditions. Before I turn the call back over to Greg, I want to briefly address the FAS 133 mark-to-market for the quarter, especially given the size of it, the charge relative to prior periods. FAS 133 governs the accounting for derivative instruments we use to manage certain risks including commodity price risks inherent in our business as well as embedded derivatives in certain physical contracts. Such derivative instruments are recorded on the balance sheet as either assets or liabilities measured at their fair value as of the balance sheet date. In addition, changes in the fair value of derivative instruments are recognized currently in earnings, which we include in our FAS 133 adjustment under our selected items impacting comparability unless specific hedge accounting criteria are met, in which case, the changes in fair value of these cash flow hedges are deferred to other comprehensive income or OCI and reclassified into earnings when the underlying transactions ex earnings.

PAA uses derivatives as an effective element of our risk management strategy. In all cases, we are using derivatives for hedging purposes, and not withstanding the accounting treatment, they are economic hedges. In certain cases, some derivatives are not consistently effective within a specified range to be consistently treated as a hedge for accounting purposes. In other cases, for administrative reasons, we do not designated certain derivatives as hedges for account ing purposes. As a result, both the balance sheet and the income statement can be impacted by significant fluctuations in commodity prices, primarily crude oil. During the second quarter, crude oil prices increased approximately 40%, increasing from approximately $100 a barrel on April 1 to approximately $140 per barrel on June 30. The unprecedented increase in price and volatility in the second quarter resulted in a significantly larger FAS 133 adjustment for earnings for the quarter than we have had historically. However, just like in the past, we expect that these amounts will reverse in future periods as the applicable underlying physical transactions are settled. It is worth noting that as the physical transactions settle, the previously recorded derivative valuation or adjustment reverses for both types of hedges, those that are recorded through earnings as well as those that are recorded through OCI. I apologize for being somewhat redundant to the July 17th press release, but we wanted to be clear that despite the larger than usual adjustment, this quarter's hedging activities are consistent with our previous activity and are consistent with our risk policy. We thought this was particularly important given the recent industry events. Along those lines, we are happy to answer any additional questions you may have on this topic during the Q&A session. With that I'll turn the call back over to Greg.

Thanks, Al. As I mentioned at the beginning of the call, this has been a very active period for us. In addition to all the performance growth and finance activities just discussed, we also recently announced a number of organizational changes. These changes included Mark Shires' retirement as Senior Vice President of Operations and the promotion of both John vonBerg and Mark Gorman to Senior Vice President and Mark Gorman's assumption of oversight of the operations function effective August 1st. We also announced that effective November 15th, 2008, Phil Kramer will be turning over the CFO position to Al Swanson in conjunction with Phil taking on commercial responsibilities with respect to the oversight function for lease gathering activities that previously reported to Mark Gorman. Substantially all of these changes are consistent with succession plans we've had in police for a period of time and believe illustrate the breadth and depth of our management team and their cross-functional versatility. We're also fortunate to expand the management team through the addition of Chuck Kingsville Smith as Vice President and Treasurer. Chuck's addition will enable Al Swanson to focus on his expanded responsibilities as Chief Financial Officer, a position for which Al is very qualified. And I look forward to continue to work closely with Al in his new role .

Before we move on I want to say a few words about Mark Shires' retirement. I've had the honor and the privilege of working with Mark Shires for nearly 25 years. Mark joined the Plains organization in 1984 when I believe we had less than 50 employees at the time, and that compares to over 3,000 currently. Since that time, he has been involved in a number of growth initiatives, the most notable of which was the construction of the Cushing terminal. He moved his family in the early 1990s to the Cushing area and supervised the construction first hand on a daily basis. The pride and quality of the many hours he invested in that project are still evident today. On behalf of the Board and our unitholders, I want to publicly thank Mark and his family for the many contributions and sacrifices over that time period and assure you that he will, indeed, be missed.

It has been indeed a very active and productive first half for PAA. We've accomplished a lot in a short period of time and during a very volatile and unstable financial market. With that in mind, I want to briefly summarize what we believe are seven important take-aways from today's call, which are also highlighted on slide 13. The business, number one, is performing very well in a less than optimal market environment, which we believe again underscores the strength of our business model and the value of our asset base. The integration of the Rainbow acquisition's on schedule and performance is on track. Our capital programs are generally progressing as forecast and we continue to add to that inventory projects for future period, which extends our visibility for projecting continued growth. We are on track to achieve our increased distribution target for 2008 and to deliver on our targeted distribution growth over the next several years, with acquisitions providing an upside to the targeted 5 to 8% range. We have a strong balance sheet, excellent liquidity, and solid credit metrics, and we're well positioned to capitalize on acquisition opportunities that we think will become available over the next 18 months. We have a strong and supportive group of general partner owners and a seasoned and capable management team in place to execute our business and growth plans for the next several years. And finally, we believe we have demonstrated our commitment to transparency and will continue to provide our stakeholders with the information necessary for you to monitor our performance and measure our progress against our goals.

Realize that these are, indeed, uncertain times in the broader financial markets and for the economy in general and that PAA is not being singled out within the MLP universe. Given our solid fundamental performance in all types of markets, our consistent increases in quarterly distributions and the fact that we took appropriate steps to prepare for the unstable financial market conditions, I have to admit it's nonetheless frustrating for management and our unitholders to see our unit price performing in a lackluster fashion. With that in mind, I want to pass on two observations. Number one, we continue do believe PAA represents a relatively low risk investment that, absent major acquisitions, generates a current yield plus stable growth resulting in a sustainable low to mid teen all-in return. And if we can continue to capitalize on attractive acquisition opportunities, we believe we have the potential to equal or exceed the upper end of that targeted range. And then number two, we also believe that we keep our head down, generate solid results, achieve stated goals, remain humble when times are good and persistent when times are challenging and be honest and transparent at all times, the unit price will take care of itself. We welcome our views and we thank you for your continued interest and support of Plains All American and we look forward to seeing speaking you again on our conference call in early November . Operator, at this time we'd open the call up for questions.

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) One moment, while we poll for questions. Our first question comes from Gabe Moreen with Merrill Lynch . Please proceed with your question.

Good morning, everybody.

Good morning, Gabe.

A couple questions just on the access inventory gain. Was that just a question of line fill. I'm just wondering in terms of how that came about exactly.

Gabe, this is Harry. Just through our normal asset management. We saw prices run up. We look around and try to find to where we had it at excess inventory, some of it was deliveries coming in excess of forecasted deliveries and some of it was just working inventory where we have operations and we're able to get our inventory requirements down a little bit. So it's a combination of the two of those.

Obviously we're in contango two-and-a-half years, and so obviously carrying inventory forward, we had to build up line fill positions and a lot of pipelines et cetera, as that price came off -- or the contango came off, as Harry said, we made sure we scavenged and cleared all the cupboards out to make sure we took advantage of the high prices.

Not a bad time. Are you finding some excess inventory around? On the Oxy investment -- and I noticed the release just crossed in terms of closing their investment in the GP. Is it contemplated for your marketing arm to potentially get involved with marketing their crude oil barrels of production.

It's fair to say that during the discussion courting process, where we were looking at them and they were looking at us, that we discussed in general at a very high level several concepts of potential win-win opportunities. I think the press release put out, there are no existing commitments, other than we just both want to explore how we can do win-win transactions, so certainly wouldn't want to rule out anything at this point in time.

Okay. Good to hear. Greg, one larger picture question. In terms of what we've seen out of the refiners and their quarterly results, the recurring theme has been reducing their inventories as much as possible and working capital needs given the prevailing refining environment . GIven their reduction in inventories, is that an opportunity for you guys?

Well, I think any time people change their practices, Gabe, they 're going to cause a ripple across the system. Right now everybody seems content that they're not going to run out of crude oil. Certainly there is no indication anybody is. But at some point in time, if you lower inventory levels extremely low, if we were to get impacted by hurricanes or world events, it is going to cause a ripple across. And our assets and our business model position us to be insulated from the downside effects of volatility and positioned to benefit from the upside benefits of volatility. So I would have to say yes at that level. Which refiner and which area that's impacted will determine whether, how pleasant or neutral that event is .

Fair enough. Thanks, Greg, appreciate the answers.

Our next question comes from [Brian Veron] from Lehman Brothers. Please proceed with your question.

Hey, Brian.

Your line is live.

Good morning. The expansion capital of 460.

Yes.

Is that up from 380 from prior guidance? Was the prior guidance 380?

The prior -- the 529 guidance -- the interim guidance, we upped it to, I believe it was 420.

420. Okay. What was the CapEx in the second quarter?

For the six months, it was 257. Is that correct? We've got some people frantically picking here. It was 256 for the first six months of the year. And I want to say is around 100 for the first quarter. So call it 150. If that's wrong, we'll get back to you.

Can you comment on the attractiveness of some of SemGroup's assets?

Cautiously. What we say is we are certainly familiar with the assets of almost all of our pure MLPs and competitors even if they're not MLPs, and as you might expect, there's a lot of focus in on the SemGroup bankruptcy and the related impacts on their partnership. I think it's fair to say that we're very intimately familiar with certain aspects of the crude oil, certain of the refined products, and we are an inquisitive company and be watching anxiously to see how the bankruptcy court progresses with respect to those assets. We're probably not candidates for some of the other assets. Certainly asphalt is not down the middle of our fairway at all .

And how are you viewing the M&A market, are multiples still too high in general or are they slowly coming down?

I think what's -- we think they're actually coming down. What's fair for sure is, if somebody holds their hands up and says, "I'm holding an auction," instead of having 25 companies show up, there's a lot fewer parties coming to that data room. I think that's a combination of the increase in the cost of capital as well as the -- more scarcity in the availability of capital at a reasonable price. And so, ultimately, I think that will translate into lower multiples. As a practical matter, whether the multiples going down or not, if you simply reduce the size of the -- the number of participants and you reduce the outlier that was betting purely on lower cost of capital or a low cost in saying it's accretive because I'm small, I think it allows for fundamental companies such as Plains and others that have a true business model to let their synergies make the distinguishment on a given asset for those. So we may still pay a 9 or a 10 multiple, but if our synergies allow us to bring it down to a 7, that's fine. You'd rather buy it cheaper, but as a practical matter you don't want to focus on what the other side is making as much as you want to focus on what you can deliver to your unitholders. When we had capital back in '06 and '07 that was available to anybody who could spell MLP, even if they got the letters in the wrong order, the bottom line was we had outliers out there that could make it significantly accretive whether they ever realized any synergies just because of the cost of capital and the availability. So I think that's changed. I think ultimately our realized metrics after acquired multiples will improve and the certainty of getting attractions done will improve.

I would also say -- this is Harry -- that we really haven't seen anything close yet with a lower multiple.

You're seeing a lot of transactions where we didn't make it to the next round of the invites, and people have come back us to and said, would you still be interested? But, again, no transactions close. So there's still a -- buyers expecting a higher price and the sellers -- or the sellers expecting a higher price and the buyers are not willing to close the gap.

I appreciate the color. Thanks.

Just want to -- on, excuse me, the total CapEx, I gave you a bad number. 256 was the number for the six months. It was spread pretty equally between the first and second quarters, 124 and 132, 132 in the second quarter.

Thanks, Greg.

Thank you.

Our next question comes from Ross Payne with Wachovia Securities. Please proceed with your question.

How are you doing?

Morning, Ross.

I know we're probably beating acquisitions to death here. But can you comment real quickly on opportunities out of SemGroup, just in general what you're seeing out there? Have the opportunities increased over the last couple of months month? And also just, Allen, as an aside, congratulations on your new position.

Thanks, Ross.

You know, again, I would say -- as Harry mentioned, our activity level is high on acquisitions. That extends well beyond the SemGroup assets. The -- as Harry also said, you're not seeing that many transactions close. We had a little over $600 million done this year, but again it fit us very uniquely, and I go back to the synergies issue is going to be something that's going to be, I think, a common theme on any transaction that gets done in this market. To answer your question, I don't think there's any shortage of acquisition opportunities out there. Majors don't have to sell right now. They certainly are awash in cash. But at the same time, they have assets that are noncore, that I think they'll be trying to move over time and certainly many of those fit with our business model.

Thanks, guys.

Our next question comes from Darren Horowitz from Raymond James . Please proceed with your question.

Good morning. Thank you. My first question is on the heels of actually your response to one of Ross's questions. When you're discussing synergies and you're looking at Rainbow, can you give us some insight as to how the synergies are progressing there and maybe quantify the incremental benefit of those synergies in the back half of this year and what's included in your full-year guidance?

I can tell you that they're progressing exactly on schedule, and we believe we're going to make a very good return on that asset, or at the targeted purchase price that we paid and the targeted returns we expected. We are still subject to confidentiality agreements with the shippers. Harry did mention, effective July 1st, we did raise the tariff. We have a couple of capital projects that we have going on and to plum some of those assets in with other assets, and so I think the uplift that you saw in our guidance, which as Al mentioned, was a combination of an increase in our base-line from our pre-acquisition business, but it clearly included the benefit of the acquisition. It was only a $600 million acquisition in a $10 billion company. We raised our overall guidance 13%, so embedded in that was some uplift associated with the acquisition, as well as base-line as well as synergies. If I sound evasive, there are some competitive reasons that we wouldn't want to flash all of our plans out there as to what we intend to do that, because it is a competitive environment, especially when you're competing for the heavy barrels up there in Canada.

Sure. I understand and I can appreciate that. Second part on Rainbow, when you're looking at throughput expectations for the September quarter of 195, do you think at this point, that's kind of the consistent run rate that you're going to exit the year at or are you going to get incremental benefit as well.

Go ahead.

The way the pipeline is configured right now, there's not a whole lot of capacity increases that you can see on Rainbow. It would be maybe a couple percent higher, but it will take some of these capital projects really to expand the capacity.

When we made the announcement, we said the pipeline has an effective capacity at its current rating of around 200,000 barrels a day, and we're running about 195. It varies a little bit on any given day. As you change the composition of the crude to either a more heavy crude or lighter crude, you change a little bit of that capacity target. Some of these expansion activities that Terry mentioned are what really provides incremental benefits to the shippers as well as to us as the owner, and that gets into the competitive areas that we were talking about.

Okay. I appreciate that. My final question on the marketing side. When you -- you mentioned in your prepared remarks that, at least for the September quarter guidance, it doesn't really assume that the contango gets substantially wider relative to where it is currently. Let's just say that were to happen. What would that do not only to your crude oil gathering volumes as you exit the year, but also on the LPG side.

I think -- make sure I understand your question. You're saying if the market stays the same or if the market got very contango?

If the contango got steeper.

Well, certainly our -- I don't think it would change our marketing volumes at all, and think the LPG, which is a totally different issue, that's a seasonal issue that's really tied to weather, I don't think it would affect it. It would simply add incremental profit opportunities to do inventory carrying activities with our tanks. So it 's an upside, not a downside, but before you get to too focused on whether that's coming or not, I think actually yesterday we closed (inaudible) about $0.14. So it's kind of hugging that -- what we call a transitional market. It's not steeply contained or steeply --

Okay. Thank , Greg.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from [Noah Lerner] from Hearts Capital. Please proceed with your question.

Good morning, everybody. A quick question building off of Craig's closing comments. Knowing that there's been a significant disconnect between the fundamentals and stock performance and understanding management's typically loathe to talk about stock prices, I was just wondering if you can give us any color on what you might have been doing to get the plain story out there and if there's anything else you are planning to do that might help more people become aware of the great value opportunity there is in investing in plains?

Great question. I'll tell you what. Let me kick it over to Pat Diamond. I'll let him answer that.

Okay.

Hi, Noah.

Hi, Pat.

As you know we're certainly not shy about getting out and trying to tell the PAA story. I think at PAA -- and not only that, but also across the space -- I think we all kind of have somewhat of an obligation to get the MLP story as an asset class out there as well. Just to give you a little color on what we've done so far this year, some of these activities you've been involved with, we held our analyst conference in New York in April. We had probably 175 people participate either in person or on the webcast. We have participated in industry and investor conferences, probably five or six so far this year and probably another five to go by the end of the year. We have had a pretty robust effort, at least in my mind to get out and see retail brokerage offices on kind of non-deal road shows. We've done over 20 of those meetings thus far this year and intend to ramp up that process through the end of the year. We've held field tours from time to time. We did a Cushing field trip earlier this year for investors. We've done investor dinners, particularly institutionally oriented in New York, L.A., Boston and Tulsa this year. And clearly we have targeting lists as to institutions that we 're trying to get more involved in the MLP space and particularly in the PAA story. We've probably met with over 30 new institutions thus far this year. So just a little bit of the things that we've been doing. Clearly we 're trying to ramp up the efforts as much as we can to continue to get the story out there. As I think Greg mentioned earlier, we believe PAA is a good value at the current price and want to do everything we can to get that story out there. And along those lines, if you or for that matter any other of our stakeholders have any suggestions or ideas of how we can do things better, we're certainly open to considering those, so feel free to -- for any of you to give me or Roy a call or drop us an e-mail.

Will do. Thanks a lot.

Thanks Noah.

There are no further questions in queue at this time. I'd like to turn the call back over do Mr. Armstrong for closing comments.

Once again we'd just like to thank everyone for their support and attention to PAA. We pledge to continue to do our best to deliver or exceed the targeted results and look forward to updating you on the November call. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.