Plains All American Pipeline LP (PAA) 2008 Q3 法說會逐字稿

Welcome to Plains All American Pipeline's Third Quarter 2008 Conference Call.

During today's call, the participants will provide forward-looking comments on partnership's outlook, as well as review the results of 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 its website at www.paalp.com, in particular, the section entitled, Non-GAAP Reconciliation, which presents certainly 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 session also presents a reconciliation of those non-GAAP financial measures and 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 excluded in the selected items impacting comparability.

Today's conference call will be chaired by Greg L. Armstrong, Chairman and CEO of Plains All American Pipeline. Also participating in the call are Harry Pefanis, Plains All American President and COO, and Al Swanson, Plains All American's Senior Vice President-Finance. I will now turn the call over to Mr. Greg Armstrong.

Thank you, Bob. Good morning and welcome to everyone. Despite the challenges imposed on our operations and personnel as a result of Hurricanes Gustav and Ike, Plains All American delivered third quarter results which were solidly in line with our guidance range.

Before I get into details of our performance for the quarter, I'd like to spend a few minutes addressing how PAA is positioned for the recent and severe deterioration in global financial markets.

Although we did not anticipate the severity and magnitude of the current adverse conditions, we have been preparing for a significant softening of the US economy and financial markets for quite some time.

Accordingly, we have taken a number of pro-active and pre-emptive steps to maintain PAA's financial strength and flexibility, as well as our ability to generate baseline cash flow.

Although almost every company in the US will be impacted in some way as a result of these steps, we believe that PAA is well positioned to continue to execute our business plan and create long-term value for our stakeholders.

In that regard, I want to highlight 5 points for your consideration, many of which will be reinforced by the remainder of our call today.

First, the fundamentals of PAA's energy infrastructure business remain sound. We see continued demand for PAA's assets and services, which play a vital role in the distribution of North American energy products.

Our assets and marketing activities service a variety of supply-driven and demand-driven markets, principally related to crude oil. Capitalizing on demand for our assets, we have increased our fee-based business activities by leasing to third parties the storage capacity and moving constructed tanks, as well as certain tanks previously reserved for our proprietary use.

By doing so, we are also getting the benefit of reducing our working capital requirements.

Second, we are projecting solid growth for 2009. The anticipated increase in adjusted EBITDA from 2008 to 2009 is primarily driven by capital we have invested in 2008 and 2007. It is not materially dependent upon our 2009 capital program.

We are currently working through our planning process and we intend to update our 2009 guidance in conjunction with our year-end earnings call in February.

Third, PAA has a strong capital structure and solid liquidity position. We have consistently pre-funded or simultaneously funded our acquisition expansion activities, which means the recent and rapid deterioration of financial markets has not impacted PAA as much as it otherwise would have.

During 2008, we raised $915 million of long-term debt equity capital to fund the Rainbow acquisition and our 2008 capital program, as well as to further strengthen our balance sheet and liquidity position. As of September 30, we had $765 million of availability under our revolving credit facility and we are in the process of converting our uncommitted hedged inventory facility to a committed facility and extend it for another year.

Fourth, PAA has a diversified and scalable portfolio of organic growth projects, which provide significant flexibility to adapt to changing economic and financial market conditions. PAA has not committed to any multiyear, multibillion dollar capital programs which would necessitate the raising of significant amounts of capital.

Additionally, PAA has assembled a preliminary expansion capital budget for 2009 of approximately $250 million, which is approximately half the level we spent in 2007 and 2008.

Lastly, and perhaps most importantly, in the current environment, PAA is positioned to execute its capital plans through 2009 without reliance on the financial markets for incremental debt or equity capital and while still maintaining ample liquidity and solid credit metrics.

To put that in perspective, despite planned expansion capital spending of $340 million over the next 15 months, we are targeting to end 2009 with an aggregate debt level that is relatively unchanged from the balance at September 30, 2008, even if we do not access the capital markets for either debt or equity.

To make that possible, the vast majority of the funding for PAA's 2009 capital program and the remainder of the 2008 capital program will be provided by a combination of cash flow and excess of partnership distributions, proceeds associated with planned reductions in crude oil and LPG inventories, and pending asset sales.

Clearly, achieving this objective will require successful execution of our business plan, but we believe that this objective is both achievable and prudent in this environment.

With respect to the current state of the financial markets, I think most everyone on this call would agree that the global financial community is in uncharted or at least unfamiliar territory. Accordingly, none of us can predict with any certainty when the capital markets will stabilize or when access to, and the cost of, incremental capital will improve.

For this reason, we have positioned PAA to be able to execute its business plan throughout 2009, irrespective of the state of the financial markets. In addition, we believe we will end 2009 so that we will also be favorably positioned, should the current economic and financial market conditions persist into 2010.

Let me address how PAA's 2008 and 2009 distribution growth fits into the financial picture.

Due to the unstable and uncertain financial markets, we chose to exit 2008 with a modest increase in our distribution level that, combined with increases earlier in the year, achieved year-over-year distribution growth of 6.3%.

This increase is solidly in the middle of our beginning-of-the-year target for distribution growth of 5% to 8%. However, the $3.57 per unit annualized distribution rate was below the increased exit range of $3.61 to $3.66 per unit that we targeted in connection with the Rainbow acquisition.

Tough environments require us to make tough decisions. As stated in our distribution press release a few weeks ago, we believe it is important for us to balance the near-term benefits of distribution growth with the long-term benefits of cash flow retention.

Since 2005, PAA has retained aggregate cash flow in excess of distributions of over $400 million, which we have reinvested in our business and used to reduce our reliance on the outside equity capital markets.

In most cases, the retained cash flow was associated with baseline plus performance due to favorable market conditions or was simply in excess of our targeted distribution growth for that period.

In this case, while we certainly had the coverage to achieve that target that we had set earlier in the year, we chose to make a midcourse adjustment to balance a number of considerations.

Solely for purposes of illustration, a difference in the distributions of $0.10 per limited partner unit on an annualized basis equates to approximately $25 million of equity that PAA is not required to go into the market and raise, with half of that amount being associated with cash distributions that would otherwise be payable to our general partner.

Just as there is no one-size-fits-all distribution policy, there is no one way to manage the capital needs and sources in the current environment. As we sit here today, we do not know enough about the future to modify our 5% to 8% targeted distribution growth.

Instead, we intend to closely monitor the financial markets, as well as attractive growth opportunity that exists in this type of market, to determine how best to source and apply our capital resources.

We are sensitive to the needs of all of our investors and we are particularly cognizant of the broad retail investor base that purchased our units with the dual objectives of maintaining the current distribution level, as well as generating minimum distribution growth in order to offset the impacts of inflation.

We are also charged with adapting to change and making the best long-term decisions to preserve and grow the value of the enterprise on a per-unit basis.

Accordingly, we intend to manage all of our resources in a manner appropriate to the situation.

On balance, we are comfortable with our decision on the November distribution and believe it provides us with significant and valuable optionality.

In addition, we think that in the current environment, our existing unit holders would much prefer more moderate distribution increases if such restraint helps avoid pushing a secondary offering into a weak market to balance our capital needs.

Furthermore, we are well positioned, as we believe PAA is only one of a handful of MLPs that can execute its 2009 capital plan without needing to access the capital markets, or otherwise raise new capital, and without significantly leveraging its balance sheet or impairing its liquidity.

With that lengthy, but important introduction, let me comment briefly on PAA's third quarter financial results, before turning the call over to Harry to discuss our operating activities and capital projects.

Yesterday, Plains All American reported operating and financial results for the third quarter of 2008 that were solidly in line with our guidance. As summarized on slide three, adjusted EBITDA totaled $223 million and adjusted net income for the quarter was $119 million, or $0.70 per diluted unit.

I would note that our third quarter results were negatively impacted by Hurricanes Gustav and Ike. We estimate that the impact of the storms on our results was approximately $10 million to $15 million, comprised of an estimate of reduced revenues attributable to disruptions in crude oil transportation and marketing volumes, insurance deductibles associated with response and repair costs, which we are including in our operating expenses, and a $1 million contribution to a relief fund to assist our employees that sustained hurricane damage.

Our third quarter results were positively impacted by an approximately $12 million gain on the sale of our shares on the New York Mercantile Exchange, which resulted from the NYMEX's August 2008 merger with the Chicago Mercantile Exchange.

As shown on slide four, with the addition of this quarter's performance, we have delivered performance in line with our public guidance for the past 27 consecutive quarters 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 varied widely with respect to absolute crude oil price volatility, market structure, and, also, basis differentials.

Accordingly, we believe the comparison provided by these graphs highlights the merits and strength of our business model and the strategic role in diversity and value of our assets in the industry.

I would also like to mention that Phil Kramer, our Executive Vice President, is with us on the call today and will be available to answer questions during the Q&A period.

As you may recall from our July press release, Phil has take responsibility for the lease gathering business and related support functions, and will be relinquishing the CFO role.

Al Swanson, currently our Senior Vice President-Finance, is taking over the CFO role.

The official date of these changes is November 15, but the transition has been in progress for some time and Al will be presenting the finance portion of our call today.

With that, I will turn the call over to Harry.

Thanks, Greg. During my portion of the call, I will review our third quarter operating results compared to the midpoint of our guidance issued on August 6, 2008, discuss the operational assumptions used to generate our fourth quarter guidance, and discuss the progress of our expansion capital program.

Let me begin with our operating results for the third quarter. As shown on slide five, adjusted segment profit for our transportation segment was $120 million or $0.44 a barrel, which is about $6 million above the midpoint of our guidance range.

I should point out that our operating expenses, in total, were in line with our guidance, but the amount attributable to the transportation segment was a primary reason that segment profit was above the midpoint.

The total volume of 2.98 million barrels per day was just slightly lower than the midpoint of our guidance range. We experienced lower volumes on several of our Gulf Coast pipeline systems due to the hurricane. Capline accounted for most of the difference and volumes on this line were lower, as in our guidance, primarily due to the volume losses from connecting carriers.

Adjusted segment profit for the facilities segment was $40 million or $0.23 per barrel, both of which were in line with the guidance midpoint, as was our average capacity of 58 million barrels per month.

Adjusted segment profit for the marketing segment was $49 million or $0.65 per barrel compared to the guidance midpoint of $60 million and $0.75 per barrel.

Marketing volumes were 809,000 barrels per day compared to 867,000 barrels per day in guidance. The lower volumes were due to a combination of lower volumes due to the hurricanes, lower lease volumes in Canada, and a little lower LPG sales volumes.

The lower volumes, as well as the higher operating expenses attributable to this segment were the primary reason for the lower-than-forecasted performance.

In addition, a force majeure event delayed a foreign cargo from being delivered during the third quarter, which shifted approximately $2 million in the third quarter to the first quarter of 2009.

Maintenance capital expenditures were $19 million in the third quarter. Maintenance capital for the year will likely be a little higher than previously forecasted, primarily because costs have just been running a bit higher. For the full year of 2008, we're expecting maintenance capital to be about $75 million.

Let me now go over to the operational assumptions used to generate our guidance for the fourth quarter, which was furnished in our Form 8-K issued last night and is shown on slide six.

For all three segments, references to segment profit excludes selected items impacting comparability.

For the transportation segment, we expect volumes to be just over 3 million barrels per day, which is a little stronger than third quarter volumes.

Facilities segment guidance is based on forecasted volumes of 56 million barrels per month of crude oil, refined product and LPG storage, 13 BCF per month of natural gas storage and an average of 18,000 barrels per day of LPG processing throughput volumes, for a total of 59 million barrels of capacity per month.

These increased storage volumes reflect additional tankage being placed into service at our Paulsboro and North Philadelphia terminals in the fourth quarter.

Marketing segment guidance includes forecasted lease gathering volumes of approximately 640,000 barrels per day, LPG sales volumes of 110,000 barrels per day, refined product sales of 28,000 barrels per day, and waterborne foreign cargo volumes of 74,000 barrels per day.

The sum of these volumes yields total volumes for the marketing segment of 852,000 barrels per day. Our forecast for the fourth quarter assumes an approximate 35,000 barrels per day negative impact on the [lease gathering volumes] due to the lingering effects of Hurricanes Gustav and Ike, and an increase in LPG sales due to weather-related seasonal demand.

With regard to our capital projects, slide seven shows the expected in-service timing of our larger projects. At Paulsboro, we placed 450,000 barrels into service effective November 1st and remain on track to place the remaining 550,000 barrels of tankage into service during the second quarter of 2009.

We expect to place the Salt Lake City pipeline expansion into service in December. We will finish the construction of our original 2.8 million barrels of Patoka Phase I tankage in November, but it looks like third-party pipeline connections won't be completed until December. Accordingly, the facility won't be in service until January 2009.

Also, as I mentioned on our last call, we don't expect full utilization of this facility until the second quarter of next year, when some of the new Canadian pipelines bringing crude to Patoka are complete.

At West Hynes, we plan to have our 550,000 barrels of new capacity staged into service by the end of next month.

We're proceeding as planned on our previously announced Canadian projects, which include our pumping and connection projects at Kerrobert, new tankage at Edmonton, and the reversal of the MAPL system and various Rainbow-related projects.

At Pier 400, we continue to work with the requisite groups to advance this project through the regulatory process. As indicated last call, we urge caution in modeling a start date for this project, as we continue to refine the cost estimate for the project and hold discussions regarding such costs and expect additional mitigation measures with our various customers.

As shown on slide eight, our aggregate 2008 expansion capital program totals $470 million. There has been some shifting of costs between projects due to the timing of the spending and refinement of some costs, so the total is up about $10 million from last quarter.

In addition to our 2008 expansion capital, the PAA/Vulcan gas storage venture is de-brining the first cavern at Pine Prairie. It will be a five BCF cavern and we expect to have it in full service around the end of the year.

The venture is making good progress on the leaching of cavern well two and we expect to have this cavern in service by mid-2009. For modeling purposes, we are assuming that all cash flow in the joint venture will be used to fund ongoing construction costs and will reduce project debt.

On October 22, we announced that we expect our 2009 capital program will be about $250 million. We will be finalizing our planning process for next year over the next few months and intend to provide you with a breakdown of the major capital projects in the program in conjunction with our year-end conference call in February.

The 2009 capital program will include a couple of new projects, as well as some carryover projects from 2008. One of the projects that has been approved for 2009 is the construction of light-product storage tankage at both St. James and Patoka. This project will include 900,000 barrels of tankage at St. James and 600,000 barrels of tankage in Patoka and is underpinned by long-term contracts with a third party.

This new tankage will complement the new dock that is currently under construction at St. James.

With respect to our acquisition efforts, the integration of the Rainbow Pipeline system is progressing well and is on target. We also plan to close a small acquisition in mid-November, and the purchase price is $43 million.

Before I turn it over to Al, I want to briefly touch on the potential impacts to our business from lower commodity prices and/or demand destruction.

As we have stated in the past, the outright commodity price does not have much of a direct impact on our business. The outright price does impact the value of our pipeline loss allowance barrels, but this is somewhat offset by the impact prices have on our fuel and power costs.

We think we have a bit of built-in cushion in our cash flow for the next few years, as we have hedged a meaningful portion of our expected pipeline loss allowance barrels at price levels that are higher than the 2008 hedge levels, and we have hedged a portion of our forecasted fuel and power requirements at levels that are consistent with our 2008 hedge levels.

Over longer periods of time, lower oil prices can impact production from fields that supply our pipelines, and we may see a slowdown in drilling activity for a short period of time until service costs adjust, but we don't think we are at price levels that will result in significantly lower levels of domestic oil production.

With respect to demand destruction, pipelines that deliver crude oil to refineries, or that move products from refiners, could be impacted by demand destruction.

We have some of those types of assets, like Capline and our refined product pipelines. However, we think that any impact on these pipelines due to demand destruction would be largely be offset by arbitrage opportunities resulting from supply/demand imbalances, as we do not think the curtailments of crude oil supplies will move lockstep with demand destruction.

So with that, let me turn the call over to Al.

Thanks, Harry.

During my portion of the call, I will discuss the FAS-133 gain, the inventory value adjustment, and the foreign exchange, or FX loss on net monetary assets that were included in our third quarter results.

I will also discuss our capitalization, liquidity, outlook for 2009 financing requirements, guidance, and our hedging activities and use of financial derivatives.

Our FAS-133 gain for the quarter was $163 million. This was not unexpected. As discussed last quarter, we expected the impact of the prior period FAS-133 losses would reverse in the future as physical transactions underlying the hedges settle. In this situation, the reversal was also increased by the approximate $40 per barrel decrease in crude oil prices.

The $40 price decrease effectively retraced the $40 price increase that occurred in the second quarter. A material portion of the FAS-133 gain is associated with derivatives used to hedge physical inventories of LPG and crude oil.

In the quarter, we also recorded an inventory valuation adjustment totaling $65 million. Effectively, this is a charge to reduce certain inventories to the lower of cost or market, or LCM.

The applicable LPG and crude oil is hedged with financial derivatives and the charge is associated with reducing the cost of the inventory-to-market is materially offset by the previously discussed FAS-133 mark-to-market gain.

Generally accepted accounting principles, or GAAP, does not require an LCM adjustment when the hedge is a physical sales contract, but does require an LPM adjustment when the hedge is a financial derivative that is subject to FAS-133.

The final accounting item from the third quarter is the FX loss on net monetary assets, which, for the quarter, was $8 million. Our Canadian crude oil and butane business is conducted in a Canadian subsidiary that is a Canadian dollar functional currency entity.

The majority of the butane business is conducted in US dollars, which is also PAA's functional currency. GAAP requires the FX valuation changes on net monetary assets be recorded through earnings, while FX valuation changes on non-monetary assets are recorded through other comprehensive income, or OCI, or equity.

Applying this standard to PAA's butane business, we purchased butane inventory using US dollar denominated short-term debt within our Canadian dollar functional currency entity. The short-term debt is considered a monetary asset and is revalued with the corresponding gain or loss recorded through earnings.

For the third quarter, this is what is driving the $8 million FX valuation loss. The inventory is not considered a monetary asset and is not revalued, so no corresponding gain is recorded.

As the actual business activity is US dollar denominated and PAA is a US dollar entity, there are no real economic FX risks and no real economic FX loss.

As the inventory is sold this winter, our reported margin will be higher as a result of the lower valued inventory, effectively reversing the FX loss. Accordingly, we have classified the $8 million loss as a selected item impacting comparability.

As the loss reverses through the higher margins, we will classify the higher margins as a selected item impacting comparability, thereby reversing the FX loss we segregated in the quarter. With the accounting matters out of the way, let me now move on to our capitalization and liquidity.

As summarized on slide nine, we ended the third quarter with strong capitalization and liquidity and we're also within our targeted credit metrics.

At September 30, our long-term to capitalization metric was 47%, which is favorably below our target of 50%. Our third quarter adjusted EBITDA to interest coverage multiple was 4.3 times and utilizing the annualized combination of our third-quarter performance and the midpoint of our fourth-quarter 2008 adjusted EBITDA guidance, our long-term debt to adjusted EBITDA ratio is 3.5 times.

As of September 30, we had $765 million of availability under our $1.6 billion committed revolving credit facility. That facility matures in July 2012.

We had $762 million in borrowings out on the facility and $73 million of letters of credit issued. The $762 million of borrowings primarily relate to the routine seasonal build of LPG inventory.

In our LPG business, we typically build inventory during the summer and fall and sell the inventory during the winter heating season. The majority of the LPG has already been sold using forward physical or financial contracts. Over $500 million of the inventory is expected to be delivered and sales proceeds received during the next 6 months, which will be used to reduce the balance outstanding on this facility.

In light of the current financial environment, we have received several questions about the institutional concentration in our revolver and general questions about the certainty of its availability.

Although the full credit agreements, as well as participating institutions, are available in our public filings, I want to let you know that our revolver includes broad participation from 25 financial institutions, with no one institution holding more than 6% of the total facility.

Specifically, the more traditional investment banks, such as Lehman, are not participants in any of our credit facilities and we have not had any lenders default on their obligations.

The revolver does not contain material adverse change language, or MAC, and it does not contain a required cleanup provision. We designate borrowings on the revolver to fund the purchase of hedge inventory as working capital borrowing, which require repayment within one year.

This requirement is self-imposed and we elect to do so to match the duration of the borrowings with the duration of the asset, which is less than a year. However, this designation is not a requirement under the credit agreement and the working capital borrowings can be refinanced with a normal long-term borrowing under the revolver.

The partnership also has a $1.2 billion uncommitted hedged inventory facility, which had $586 million drawn at September 30. These borrowings are related to and are secured by crude oil volumes that are hedged through forward sales contracts.

This is a self-liquidating facility, as the proceeds from such sales are used to repay the borrowings under this facility. As shown on slide ten, borrowings under this facility have averaged less than $500 million over the last 5 quarters.

In recognition of reductions in potential working capital requirements due to increased tank leasing, inventory reductions, and lower oil prices, and in light of the current credit market environment, we are in the process of replacing this facility with a $525 million, 364-day committed credit facility that will accommodate our anticipated baseline activity levels. We expect to close the new credit facility later today.

The partnership's long-term debt balance at September 30 was $3.2 billion and was unchanged from June 30. This balance is comprised entirely of senior unsecured notes, with fixed interest rates on 98% of the balance.

The average tenor of the senior notes is approximately 13 years. As you can see from slide 11, we have a very attractive maturity profile. Over the next three years, we have only one series of notes maturing. It's $175 million and that's in August of 2009.

If debt capital market conditions improve to the point where it would be attractive for us to refinance these notes with a new issuance of senior unsecured notes, we plan to do so. If the market doesn't improve, we have sufficient capacity on our revolving credit facility to retire the notes.

By using a combination of cash flow in excess of distributions and proceeds associated with planned reductions in crude oil and LPG inventories and pending asset sales, we expect to be able to fund our capital requirements through the end of 2009 without needing to access the debt or equity capital markets.

As an aside, the asset sale proceeds will be generated by previously announced contribution of cash by an affiliate of Holly Energy Partners for a 25% interest in our Salt Lake City Pipeline and the sale of excess crude oil line fill associated with post-acquisition synergy realization plans on Rainbow.

In the aggregate, we expect to receive approximately $60 million in proceeds from these two transactions. Importantly, by funding our capital with proceeds from asset sales, cash flow in excess of distributions, and proceeds from inventory liquidations, we will also not increase the total leverage of the company over this timeframe.

I do want to make one important distinction about this financing plan. Although we believe we have positioned ourselves prudently so that we do not need to come to market for debt or equity capital during 2009, our preference is very much to continue accessing the debt and equity capital markets, if those markets are open and reasonably priced.

As Greg mentioned earlier, we have adapted and will continue to adapt to a period of challenging financial markets and our future distribution growth and the amount of cash flow we retain in the business will be influenced by the state of the bank and capital markets.

Let's now move on to guidance. Yesterday, we furnished guidance for the fourth quarter in a Form 8-K. As shown on slide 12, we expect fourth quarter adjusted EBITDA to range from $225 million to $245 million, with adjusted net income ranging from $112 million to $135 million, or $0.66 to $0.85 per diluted unit.

I might point out that this guidance incorporates a portion of the third-party tank leases discussed in our distribution press release and that Greg referenced earlier.

In addition to increasing our fee-based business from third parties, it also reduces our working capital requirements in our marketing segment, but will also reduce the range of potential upside we can realize in favorable market conditions. However, given the tight credit markets, we believe that this is a very prudent step that will be appreciated by our unit holders.

In our Form 8-K, we also commented on the preliminary 2009 guidance that was initially provided on May 29, 2008. The initial adjusted EBITDA guidance for 2009 was based on an FX rate of $1 CAD to $1.00 US, or parity. The closing FX rate on May 28 was $0.99 CAD to the US dollar. The average FX rate for the first 9 months of 2008 was $1.02 CAD to $1 US.

During October, the Canadian dollar weakened significantly, ending October at $1.21 CAD to the US dollar. As you can see from slide 13, this is an extreme movement in a very short period of time. So, it is difficult to forecast what 2009 may bring.

The negative impact to the preliminary adjusted EBITDA guidance for 2009 at a $1.20 CAD to the US dollar, as compared to parity, would be approximately $30 million, net of hedges. Within a given period, the actual economic impact of an adverse change in the FX rate is reduced or offset by a corresponding decrease in Canadian interest expense, taxes, repayment of third-party Canadian dollar debt and capital reinvested within Canada. Approximately 45% of our preliminary projected capital expenditures for 2009 are associated with Canadian capital projects.

In addition, we have hedges in place for the amount of Canadian dollars that we actually expect to return to the US. Thus, the weakening of the Canadian dollar is not anticipated to have a material negative effect on our cash flow in 2009, although it may reduce our reported EBITDA.

We have received several questions from investors about our hedging activities and our use of financial derivatives. We use derivatives as an effective element of our risk management strategy. We do so to eliminate or mitigate risk inherent in our business. We do not use derivatives to create risk positions or for speculation.

We have well established risk control procedures that have been in place for a number of years, are monitored daily, and frequently audited.

In light of the recent industry events, we initiated and completed a comprehensive independent review of our risk controls, the objective being to assess whether they are designed and operating effectively. The review did confirm that our risk controls are, in fact, designed and operating effectively.

Also, based on the questions, there appears to be a misconception as to the magnitude of the hedging that our business requires relative to the size of PAA. A large majority of our business activity does not require any form of hedging. The result is, that relative to the size of PAA, our use of derivatives for hedging purposes is relatively small and the tenor of those hedges is relatively short.

Slide 14 summarizes, for each of the last 6 quarters, our book capitalization, our net open derivative asset or liability as required to be recorded under GAAP, and the end of the quarter crude oil price. As a percentage, the open derivative asset or liability has ranged from 0.6% to 2% of our book capitalization.

This is during an 18-month period of extreme and unprecedented price volatility. It should be noted that several of the other large-cap MLPs and many of the smaller MLPs have ratios that are substantially higher.

At September 30, the value of our open derivatives was a net asset of $84 million, which is approximately 1.2% of our book capitalization. Of this net $84 million asset, approximately 80% will roll off within 6 months.

Before I turn it back over to Greg for his closing comments, I want to give you a heads-up on one other item. Due to recent rule changes by the SEC, our current universal shelf, which was filed in July of 2005 for the primary issuance of up to $2 billion in debt and equity securities, as well as secondary sales of units by certain affiliates and certain other large owners, will expire later this month with approximately $450 million of unsold securities remaining available.

As a result, we will file a new universal shelf intended to cover our needs over the next several years and one or more new registration statements intended to cover the secondary sales that were previously registered under the expiring statements.

These actions are not motivated by any change in investment intent or specific request on the part of the owners, but simply by the SEC rule change. Accordingly, we wanted to give you some advance warning of these filings to prevent any misinterpretations or confusion.

With that, I will turn the call back over to Greg.

Thanks, Al.

Before I open it up for questions, I'd like to briefly touch on PAA's relative positioning in the MLP sector. As I mentioned before, we have been preparing for challenging market conditions for quite some time and we have a strong balance sheet and liquidity position.

When we look at the MLP sector today, we believe that PAA represents an attractive investment opportunity. One of the ways in which we believe we are attractive is that we offer the benefit of being a large, financially strong, investment grade company, with substantial liquidity in our units, as evidenced by slide 15, while also possessing a portfolio of diversified and scalable organic growth projects that is very manageable relative to our size, liquidity and capital resources.

In order to illustrate this point, we put together the chart of our investment grade peers on slide 16. The Y axis is equity market capitalization and the X axis is forecasted expansion capital expenditures.

For the CapEx amounts, we used data from recent conference calls. To the extent that information was not available at the time we finished the chart, we used data from Wachovia Securities research and took the sum of 25% of the 2008 CapEx projection plus 100% of the 2009 CapEx projection.

PAA is solidly in what we would refer to as the sweet spot of this chart, which is the upper left quadrant, large market capitalization with low CapEx requirements. Although no data set is perfect, we believe that this directionally illustrates our favorable positioning relative to our peers.

In closing, I would like to assure all of you that despite the daily distractions of market volatility and financial market developments, our management team is firmly focused on executing our business plan and creating long-term value for our stakeholders.

Our crystal ball is no better than anyone else's, but we believe that this period of market turmoil will not end in a V-shaped recovery. We think it will take time to work its way through the economy and for capital markets to ultimately improve.

As with any period like this, there will be some permanent impacts to the system, with which we will all have to deal. What is important is that, although most US companies will be impacted in some way, at PAA, we have a plan and have adapted and will continue to adapt our business where appropriate for this type of environment. None of us know how the future will unfold or how long this market turmoil will last, but we believe that this period of time in the financial markets will serve to further differentiate the participants in the MLP sector and we like our positioning for any potential consolidation activity.

There is one final item that I would like to mention regarding the recent hurricanes. Throughout the final weeks of September, many employees in our Houston office and the Gulf Coast field offices were out of power and water. Several suffered significant damage to their homes and vehicles and all needed to care for personal and family concerns.

In spite of these challenging circumstances, our employees made significant efforts and personal sacrifices to ensure that their fellow employees were cared for and our assets were protected, repaired and returned to operation as soon as practicable.

On behalf of myself, the senior management team, the board of directors, I want to personally thank each of our employees for their successful efforts in mitigating the impact of these storms. Their diligent efforts are recognized and appreciated.

We thank you all for your continued interest and support of Plains All American and we look forward to speaking with you again on our year-end conference call in February.

And, Bob, at this time, we'd open the call up for questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of Darren Horowitz with Raymond James. Please proceed with your question.

Good morning. Thank you.

Greg, can you quantify the reductions in working capital requirements in that marketing business as it's displaced by more of a fee-based aspect?

Our forecast, and it's a little nebulous, Darren, in terms of how you nail it down, but if you take into account that we will be looking to spend roughly about $340 million between September 30 and December 31, we expect the relative contribution from the sale of excess inventory, if you will, the way we're going to manage going forward, a little bit of it -- some part of it is going to be price, but about $200 million is going to come from that source, maybe it's closer to about $220 million. You'll have about $60 million from the asset sales and then the balance will be distributions -- excuse me -- cash flow in excess of distributions. So, it's in that $200 million, $225 million range.

Okay. I appreciate it. Switching over to Pier 400, based on what you see currently, can you give us an updated cost estimate and some color on anything that has changed?

I won't, but it's not because I'm trying to be evasive. If you had asked that exact same question on the last call, I'd have given you a number. Today, it would be different. Steel prices have moved down probably 15% to 20% since that time period and if the economy and everything stays where it is, you wouldn't expect it to go back up. You might expect it to come on down.

So, what you should know is that, at this point in time, we're still working through the regulatory process, and it is moving and it appears to be moving well. But it is a regulatory process, so it's hard to predict.

And we also are moving forward with preparing all the engineering and cost estimates. So, we're obviously optimistic that there's potentially a good outcome there.

The cost numbers are moving around and we're working with our customers to make sure that they realize we've got to adapt to the cost scenario that will actually -- it will be constructed under and that we have to make an appropriate rate of return in a normal environment, but especially in this kind of environment.

Sure.

It will probably be mid to late January before we have our final construction cost estimates. It's a pretty tedious process.

Okay. I understand. And just one final kind of housekeeping question. I apologize if you mentioned it earlier. But can you give us some of the details around the new committed inventory facility and any sort of costs with swapping out the old?

I guess I can. The uncommitted facility was priced in a much different environment. We will be filing, once we close it, an 8-K that will have the facility agreement attached to it. You'll be able to see what it's priced at in there.

But we are seeing costs go up. There's clearly a lot of pressure on the bank side of it, but ultimately the margin in it is representative of what is in the bank market today.

Okay. Thank you.

Thank you. Our next question comes from Mr. Michael Blum with Wachovia. Please proceed with your question.

Thank you. A couple questions. One, I guess in light of the fact that you're going to reduce your working capital requirements in the marketing business, what sort of impact will that have on your, I guess, range of profitability in that business?

Excellent question, Michael. And we referenced a little bit of it in the call. But clearly, what we used to refer to as the baseline plus, where, when the market really became very favorable and the optionality of our assets fell in our favor, that magnitude will be muted somewhat.

We certainly are not doing without proprietary tanks, but we don't have as many as we used to. So it's hard to quantify it. If you tell me the market condition, I could tell you what the impact is, because I could take that difference times barrels.

But in the past, where perhaps we may have made $60 million, $70 million in a given year in excess of what we called baseline, that number is probably going to be reduced in half and it could be a little bit less, depending upon how we continue to lease tanks.

We're seeing very attractive pricing on some of the tanks that we're moving into that. So it's a balance. But in this environment, we think it's probably more prudent to give up the upside and lock in the certainty so that you know you have the cash flow to make your distributions and you have the excess cash above distributions to stay away from the capital markets and have to go issue equity.

Thanks. I guess the flip side of that question is, if and when the environment improves down the road, what type of ability will you have to sort of go back to the mode you've been operating in historically?

Let me clarify one thing, also. It's not going to impact our baseline level of cash flow. We lease this tankage at discounts to what we're generating. I think what Greg was saying is that sometimes when the differentials blow out, you're not going to catch all that.

It modifies the baseline plus, not the baseline.

Okay.

And then your question about timing, I mean, our leases, in some cases, they range from a couple of years and, in some cases, they're longer than that. But clearly, much like we have a laddered portfolio on our debt, we have somewhat of a laddered portfolio on our leases. So we're retaining that optionality to pull back tanks, if we'd like to.

Okay.

And we can always, if the market is right, we can always construct more.

Right. Got it. The second question was just -- can you just review for us, I guess, the natural gas venture? Just maybe just walk through again what the investments you're making, what types of returns you think you can get? And I guess in light of the fact that you're going to, I guess, be re-deploying the cash flow into the entity, when do you expect to actually see net cash flows come up to the partnership?

I can. We invested initially in 2005 about $125 million for our 50% share of that venture. This is a 50/50 joint venture with Vulcan. Since that point in time, I think we've probably injected an additional $35 million net, round numbers. So we've got about $160 million into it.

It was not forecasted to have significant cash flow for distributions until really 2010. I think we actually moved that a little bit when we had the delays with the hurricanes, when Rita and Katrina came through. We got behind in our construction period. So I think we pushed it out to '11.

So there's no adverse impact in the near term. I think what Harry was clarifying in his part of the call was as this comes on stream, because we are hitting operational benchmarks now, where we just started bringing cavern one into service, cavern two is probably, Harry, what, 50% leached and the middle of next year, it'll be 100% leached and we'll start on cavern three, which is already drilled.

And we just wanted to make sure people didn't start to try and put that cash flow into our forecast in '09 and '10, because what will happen is the cash flow in the venture will be retained to finish out the construction program.

As far as ultimately, the project, itself, we think, is going to probably throw off significant EBITDA, the initial investment in the 8 multiple range, the 9 multiple range probably. With expansion, those numbers can come way on down, because much like we did in Cushing, all the infrastructure is in place and the additional caverns are minor investments relative to the significant upfront investment. So, Michael, it's not going to affect -- it wasn't in our forecast in any material way in '09-'10, and nothing has changed really.

Okay, got it.

And there is an operating facility at Bluewater, also, that's 26 BPF capacity and it's been in service since the acquisition, May 2005.

Okay. And my last question, I just want to clarify. With your new uncommitted hedge facility in place, you'll still have ample liquidity if we get back into $140-plus crude environment to fund that working capital of that business?.

When you balance the fact that we reduced the volume some by leasing, $100, I could say yes. To say yes on $140, I don't think I could right now.

Having said that, we do have an accordion feature on that facility that would let us go back up to $1.2 billion. The only difference I would tell you, Michael, is it would require a little bit different financial market than we're currently in.

However, I have trouble thinking that our economy can support $140 oil in the current. So, the only way I think you're going to get back to $140 is the belief that the financial markets have recovered and you've got a more healthy economy. The only alternative to that would be if Saudi Arabia decided to turn off the spigot, and now we're into politics and I'll let you take the questions from there.

And, Michael, we did, back when we did do that ratchet up to $140 through that period, our usage wasn't there, because the market wasn't in tango. So we were still bringing in foreign, but we didn't have near as much barrels stored.

I think our peak usage at the time was probably 870, at the most, when we had high oil prices. So, we didn't need to be into it at the time.

Okay, got it. Thank you. I'm not going to touch the politics. So thanks, Greg.

I'll catch you offline on that one.

And it's a committed facility, not an uncommitted facility.

The new one.

Thank you. Our next question comes from [Brian Zoran]with Barclay Capital. Please proceed with your question.

Did you provide a cost estimate for the refined product stored in St. James and Patoka?

They're not refined products. They'll be light products.

We have not put it out yet.

Brian, we haven't put that out yet. We'll put it out in our -- it's embedded in the 250, but it hasn't been spiked out.

Okay. And you mentioned that there's an acquisition in November?

Yes.

Can you provide a little more color on that?

Small LPG terminal, primarily fee-based, in areas that we already have operations. We've got a PA on it, but we just wanted to make sure we squared up your capital amount in there. It's roughly around $40 million to $43 million, I think.

And what is your view on -- if there is any impact on the MLP business from the new administration, the new Congress?

Well, we've had such a long time to look at the new administration, obviously, tongue-in-cheek there. Now we're into politics and I need to get Michael Blum back on the call.

We don't expect anything dramatic, but having said that, our -- I referred to it a couple times -- our crystal ball looks more like a snow globe that somebody shook vigorously right now. So I don't know that any prediction that we would make would have any merit right now in terms of substance. But we certainly have not heard of anything coming across the transom that suggests we ought to be on the lookout for. We're always nervous just because that's our business is to be nervous about everything.

Thank you.

(Operator Instructions). Our next question comes from the line of [Steve Marseco] with Morgan Stanley. Please proceed with your question.

Good morning, gentlemen. I apologize, because I jumped on a little bit late. So, if this has been addressed, I apologize.

But if you could potentially talk about any discussions that you have been having with Occidental on projects, anything related to anything that could be pursued in the coming months or financing, just how you're viewing this relationship going forward and how it's maybe progressing in light of the current fragmentation of MLP values and what's going on in the markets?

Not much to report, Steve, at this point in time that we can say publicly. When we started the venture, we were both committed to trying to explore fundamental operational opportunities to both make more money.

Those types of opportunities have not been influenced by the financial markets or anything else. So everything we thought was still there would still be there if we were right in our initial assessment.

And I'd say we're still in the honeymoon period. If you think about it, we just closed that in the middle of August. So we're right now in the middle of September. So it's only three months into it.

And we, at the time we made the announcement, said we thought it would be a 12 to 18-month period to try and kind of sort all those issues out. So certainly nothing to indicate that either side is backing away from our initial assessment that there's opportunities. The financial markets really don't affect them. And we're not quite as well positioned as they are, but they haven't affected us that much either.

And then as a follow-up, and, again, I apologize if addressed, but are you seeing more opportunities for potential consolidation in this space or assets that could be obtained by you guys, given the potential struggles by others, as we really, I think, have a shakeout within this MLP landscape?

Steve, I will tell you, I think we're starting to see signs that the ripple effect of the credit contraction that's going on and the fact that there's not free access to capital is causing -- organic projects are looking for people that can get it done with the capital and higher rates of return are probably going to be embedded in those.

As far as consolidation, I think it's really pretty early in the process. My guess is there's a lot of people trying to balance the books, so to speak, and trying to say, "Okay, gosh, if we can't access the capital markets for 3 months, 6 months, 9 months, 12 months," you'd get a different answer in each case.

If we're correct and it's not a V-shaped recovery, then I would say within the next 4 to 6 months, you're going to see serious consolidation discussions.

The only thing that I would caution is that if you put Company A with Company B and let's say Company A is superior financially to Company B in terms of their overall credit worthiness, the problem that you'll have in this environment is -- you can merge the two equities together, but you've still got to make sure you stabilize the debt position of the acquired company.

All that capital, once out, you've got to replace it and that has to be replaced probably, in today's environment, at a higher cost. And the question is, is that embedded in the exchange ratios. So, either you have to pro forma that in, you have to stabilize it, or you have to wait until the entity that's targeted actually experiences the pain associated with having to re-price that capital.

Right. Got you. Okay.

I think the consolidations will occur. I just don't think they'll occur as early as probably some people may forecast because of those types of issues.

I would tend to agree. Even though a lot has happened over a short period of time, it still is early in this process, I think, as well. So, I agree.

All right. Well, thanks a lot.

We appreciate the support.

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

Thanks, Bob. Again, we want to express our appreciation to everybody for participating in the call. We realize this is an extremely busy time of year, a lot of companies reporting yesterday, today and tomorrow.

If you're listening live, thank you for attending. If you're listening on the tape delay, we appreciate that, as well. And we look forward to reporting to you on the fourth quarter in February.

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