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Plains All American Pipeline, L.P. (NYSE:PAA)

Q3 2010 Earnings Call

November 04, 2010 11:00 a.m. ET

Executives

Greg Armstrong - CEO

Harry Pefanis - President & COO

Dean Liollio - President, PNG

Al Swanson - SVP & CFO

Analysts

Yves Siegel - Credit Suisse

Brian Zarahn - Barclays Capital

Darren Horowitz - Raymond James

John Tysseland - Citigroup

Michael Cerasoli - Goldman Sachs

Selman Akyol - Stifel Nicolaus

Jeremy Tonet - UBS

John Edwards - Morgan Keegan

Joseph Siano - Credit Suisse

Operator

Ladies and gentlemen thank you for standing by and welcome to the Plains All American Pipeline's and PAA Natural Gas Storage Third Quarter 2010 Results Conference Call. During today's call, in addition to reviewing the results of the prior period, the participants will provide forward-looking comments on the partnership's outlook for the future, which may include words such as believe, estimate, expect, anticipate or other words that indicate a forward view.

The partnership intends to avail themselves of Safe Harbor precepts that encourage companies to provide this type of information and directs you to the risks and warnings set forth in Plains All American Pipeline's and PAA Natural Gas Storage most recently filed prospectus 10-K, 10-Q, 8-K, is applicable and other current and future filings with the Securities and Exchange Commission.

Throughout the call participants may reference the company's by their respective New York Stock Exchange ticker symbol of PAA or Plains All American Pipeline and PNG or PAA Natural Gas Storage.

In addition, the partnership encourages you to visit the website at www.paalp.com and www.pnglp.com and in particular, the section entitled non-GAAP Reconciliation, which presents certain commonly used non-GAAP financial measures such as EBIT and EBITDA, which may be used here today in the prepared remarks and in the Q&A session.

This section of the website also reconciles the non-GAAP financial measures to the most directly comparable GAAP financial measures, and includes a table of selected items that impact compatibility with respect to the Partnership's reported financial information. Any reference during today's call to adjust EBITDA, adjust net income and the like, is a reference to the financial measure, excluding the effect of selected items impacting compatibility also for PAA also references to net income or references to net income attributable to claims.

Today's conference call will be chaired by Greg L. Armstrong, Chairman and CEO of PAA and PNG. Also participating in the call are Harry Pefanis, President and COO of PAA and Vice Chairman of PNG, Dean Liollio, President of PNG, and Al Swanson, CFO of PAA and PNG.

I will now turn the call over to Mr. Greg Armstrong.

Greg Armstrong

Thank you Gael and good morning and welcome to everyone. In addition to Harry, Dean and Al, we also have several of the members of our management team available for the question and answer session including Roy Lamoreaux, Director of Investor Relations. As a reminder, the slide presentation we will be referring to in this call is available on our website at www.paalp.com and www.pnglp.com.

Yesterday afternoon, Plains All American reported third quarter performance between the mid-point and high end of our guidance range. As illustrated on slide 3 for the third quarter of 2010, PAA reported EBITDA of $205 million and net income of $81 million or $0.28 per diluted unit. Excluding the selected items impacting comparability, which are included in the table at the bottom of the slide, our adjusted EBITDA was $264 million and adjusted net income was $140 million or $0.70 per diluted unit.

Adjusted EBITDA results, adjusted net income and adjusted net income per diluted unit for the third quarter of 2010 increased 13%, 23% and 19% respectively over last years third quarter.

In compression to guidance PAA's overall results were bear the top of the range and were highlighted by over performance in our fee based transportation facility segments and in line performance in our supply and logistic business.

Slide 4 graphically presents this quarters aggregate and performance versus guidance; highlight the fact that we have now delivered 35 consecutive quarters or results inline with guidance. PAA Natural Gas Storage also reported third quarter performance slightly ahead of the mid-point of this guidance range and Dean will cover those results later in the call.

Last month PAA had incurred a 3.3% year-over-year increase in our run rate distributions to $3.80 per unit on an annualized basis which met our distribution growth goal for the year. This equates to a 3.7% increase in distributions paid in 2010 versus 2009.

As of the distribution payable next week, PAA will have increased this distribution in 24 out of the last 26 quarters. During the remainder of the call today will focus on the following items for both PAA and PNG which are highlighted on slide 5. They include comparison of actual performance to guidance and operational assumptions that are incorporated into that guidance. Capital projects and acquisition activities update, our capitalization liquidity at the end of the third quarter, fourth quarter 2010 financial guidance and preliminary 2011 EBITDA guidance in growth capital investment plans.

With that I'll turn the call over to Harry.

Harry Pefanis

Thanks Greg. I'll now review our third quarter operating results compared to the mid point of our guidance issued on August 4, 2010, discuss the operational assumptions used to generate our fourth quarter guidance, and discuss the progress of our expansion capital programs and acquisition activities. Dean will, then, cover the PNG specific information in just a moment.

Overall, our third quarter operating results were favorable to the mid point of our guidance. As shown on slide 6, adjusted segment profits for the transportation segment was a $142 million or $0.50 per barrel, which is about $7 million above the mid point of our guidance range.

These favorable results are due to the combination of higher revenues associated with our Pipeline and also barrels and operating expenses were a little lower than forecasted. Volumes for the quarter were in line with the mid point of our guidance.

Adjusted segment profit for the facility segment was $75 million or about $0.35 per barrel, which is approximately $5 million above the mid point of our guidance. Segment capacity with 71 million barrels per month, which was in line with our guidance. Segment profit benefited from higher ancillary fees, primarily related to higher throughput volumes as well as lower operating expenses.

Adjusted segment profit for the Supply and Logistic segment was $48 million or $0.63 per barrel, which was in line with mid point guidance. With the exception of our waterborne 400 crude oil imports, volumes were in line with guidance also.

The variance in our waterborne volumes were due to arrival of a carload that was anticipated to be received in the fourth quarter. As a result, we will see lower waterborne volumes in our fourth quarter guidance.

Maintenance capital expenditures were $29 million for the third quarter, resulting in a total of $62 million since September 30th. We expect maintenance capital to run between $85 million to $90 million for the year.

Let me now move slide 7 and review the operational assumptions used to generate our fourth quarter 2010 guidance, which was furnished in our Form 8-K, issued last night.

For the Transportation segment, we expect volumes of 3 million barrels per day and segment profit of $0.50 per barrel. This volume expectation is in line with the actual results for the third quarter.

Facility segment guidance assumes total capacity of 72 million barrels of oil equivalent with segment profit per barrel of $0.33. Projected capacity is up slightly from the third quarter.

Supply and Logistics segment guidance volumes totaled 885,000 barrels per day and a projected mid point segment profit of $0.94 per barrel. This guidance includes higher volumes and margins in the third quarter, due primarily to the seasonality of our LPG business.

And moving on now to our capital program that's shown on slide 8. We have invested approximately $255 million as far this year. We've increased our total organic capital investment in growth capital investment for 2010, from $360 million to $380 million, primarily due to the addition of the new Cushing expansion which I will describe in greater detail in a moment.

The timing of our major project is represented on slide 9. Greg will discuss the capital committed to our 2011 growth project in his closing comments. I will spend a few minutes now going over some of our major projects.

Let me start with Cushing. As disclosed on Monday and then showing on slide 10, we have recently received permits that allows and expand our terminals. The newly announced expansion will add approximately 4.3 million barrels.

I'll point out to the substantial portion of the new tanks is committed to customer who keep long-term contracts. We'll also connect with the key selling pipeline which is expected to begin delivering Canadian crude oil into Cushing in 2011. Total cost for this project are expected to be approximately $85 million, of which $60 million is expected to be incurred in 2011.

On Tuesday, we disclosed information about several projects currently in progress that are part of our Mid-Continent Expansion Project as shown on slide 11, which includes de-bottlenecking segments of the Continent Systems to increase capacity in Cushing and a project to connect our Cushing Terminal as well as our Western Kansas and South Eastern Colorado systems to the White Cliffs pipeline and we expect these projects to be completed in the third quarter of 2011 at a cost of approximately $25 million.

On Tuesday, we also disclosed the Bakken Project we are pursuing. As shown on slide 12, the project will include constructing a new 103-mile pipeline segment from our current station to our Wascana pipeline. The Wascana line would be reversible because it can flow quickly to North and interconnect with third-party infrastructure in Canada that would in turn move the crude oil to Patoka or Cushing.

Total cost to this project would be in a 160 to $200 million range and would be incurred over a two-year period. We have a number of projects that are various stages of development but we matured and discuss any specific like I can tell you we're very busy and then evaluating expansion opportunities in the Wolfberry, Avalon, EagleFord and Peace River areas.

We also continued to report with our negotiations on Pier 400 one more detail update on Pier 400 once we concluded our negotiations with report in our customers. And lastly, with respect to our acquisition activity, as previously disclosed during the third quarter, we closed on an acquisition totaling $175 million. It consist of a five individual Bolton-type acquisitions including the purchase of a 34% interest in the White Cliffs pipeline and is 11% interest in Cap line and a few other complementary but smaller value assets.

We continue to actively pursue asset or acquisition opportunities in each of our operating segments.

I'll now turn the call over to Dean Liollio, President of PNG for an update on our gas storage activities.

Dean Liollio

Thanks Harry. In my part of the call, I will provide an update on PNG's activities, address our third quarter operating and financial results and share a few comments about our fourth quarter guidance and preliminary 2011 outlook.

Execution of PNG's 2010 capital program continues to progress. Overall, we remained on time and we currently expect to come in approximately 5% under the amount we had budgeted for 2010, primarily due to lower expenditures on base gas. A recap of this capital program is included on slide 13. At Pine Prairie, leaching operations continue at Cavern Well 4 and we currently estimate we have created approximately 4 Bcf of working gas capacity.

We remained on track to bring Cavern Well 4 into service in the second quarter of 2011 at approximately 7.5 Bcf or working gas capacity. In late September, we began leaching operations on Cavern Well 5 and we expect to bring approximately 10 Bcf or working gas capacity into service in the second quarter of 2012.

Negotiations are ongoing with respect to leasing capacity that will be available in the second quarter of 2011. That said, as a general rule for competitive reason, we don't comment on pricing levels or contracted volumes prior to their effective date.

However I do want to make a few comments about overall storage market conditions. As we've discussed in August, market conditions for natural gas storage have weakened rather abruptly over the past five to six months.

In our opinion the softer market conditions were primarily caused by the confluence of two significant factors. First, substantial domestic natural gas projection and second one of the hottest summers on record which led to high levels of gas fired power generation demand. We believe that either of these factors independent of the other would have created a stronger spread environment and a correspondingly stronger market for storage services.

Without strong domestic supply, the strong summer natural gas demand would have put a pure premium on winter month natural gas prices. Without the strong natural gas fired summer power generation demand we likely would have faced storage capacity concerns. In this regard, we estimate the incremental cooling in 2010 over 2010 consumed approximately 300 Bcf that would otherwise have been injected into storage.

That said, based on this mornings EIA weekly gas storage report current total gas report, current total gas in-storage is 37 Bcf above comparable 2009 levels and we still have a few weeks of possible injections remaining. As a result, based on our projections, it appears that the final peak storage numbers in 2010 will likely exceed the record levels achieved in 2009. If that turns out to be the case, we will likely test the maximum storage capacity during 2010 even after taking into account recent storage capacity addition.

In summary, given time and a return to normal weather patterns, we believe the natural gas storage markets will strengthen from current levels. At both PAA and PNG we remain confident in the long term fundamentals of natural gas storage in general and in PNG's competitive positioning in particular.

As evidence of our commitment to the natural gas storage sector and PNG's stakeholders, in response to this unforeseen softening of market conditions, in mid August PAA announced an amendment to the structure of its ownership interest in PNG. This was a pro active move on the part of PAA that reinforces PNG's ability to achieve a mid single digit distribution growth from its organic growth project, even in soft market conditions.

In turn we believe these actions also support PNG's valuation and ability to effectively compete for acquisition opportunity. Although it is challenging to predict exactly how long these conditions may last, we believe these soft conditions are temporal challenges that are correcting overtime, likely within the next couple of storage seasons in our opinion.

Reinforcing this view is the fact that the responses we received to our recent open season at Pine Prairie suggests there is volumetric demand for Pine Prairie capacity in future periods. Given our ability to add capacity at Pine Prairie at low incremental cost and on a per Bcf basis, we intend to remain opportunistic in construction additional storage capacity.

Accordingly in September, PNG submitted an application with the (inaudible) requesting approval to construct 32 Bcf of additional capacity at Pine Prairie, an expansion that will increase Pine Prairie's permitted working gas capacity from 48 to 80 Bcf. Specifically this filing requests approval to construct two additional 12 Bcf Caverns to expand Cavern wells 2 through 5 from 10 Bcf each of permitted working gas capacity to 12 Bcf each. This filing helps position PNG to meet future customer demand as market conditions warrant, while at the same time generating solid returns for our unit holders.

From a cost standpoint we estimate that we will be able to add approximately 8 Bcf of four future expansion capacity at incremental cost of $1 million to $2 million per Bcf excluding base gas costs. This cost estimate applies to the capacity we create through a process known as fill/dewater where we use the hanging strings our existing Cavern well to alternately fill and then dewater one or more caverns creating space in the process without interfering with ongoing operations.

Although this process produces space at a slower rate than directly leaching, it is clearly our lowest cost expansion alternative and we are repeatedly looking for opportunities to create space in this manner.

By comparison our cost estimate for capacity we create through direct leaching which involves drilling a new cavern well and building out the associated cavern well infrastructure, is approximately 6 million per Bcf, once again excluding base gas. Based on current gas prices we estimate that base gas cost would add slightly over $1 million per Bcf to these costs.

Our ability to add incremental capacity at such low cost is made possible by our up front investments in the pipeline manifold, water handling, filtration, and leaching systems is shows on slide 14. The flexibility of our solution mining system enables us to simultaneously leach a cavern while dewatering another Cavern or performing multiple fill/dewater operations.

We believe Pine Prairie's unique operating capabilities provide PNG the ability the bring additional storage into surface faster with a higher level of certainly and at a much lower cost that many of the operators constructing new Salt Cavern Storage capacity, as a result of these factors we believe that we have substantial profitability advantages with there ability to expand Pine Prairie and specially in the current market environment.

At Bluewater which is our Michigan storage facility we continue to make progress on our efforts to expand the gas storage capacity of this facility by removing fluid from the reservoir. During the third quarter and this far into the fourth quarter we have produced liquid hydrocarbons at an average rate of a 140 barrels per day, as described on pervious calls the volume of fluids we were able to extract at any given time, varies with reservoirs pressures.

That as pressure builds through the season our liquids removal rate can decrease and vice versa. Subject permitting requirements we are planning to drill a second well to withdraw fluid at Bluewater and in the first half of 2011.

Let me turn now to PNG's operating and financial results which are summarized on slide 15, yesterday we recorded second quarter adjusted EBIDTA and adjusted net income of $14.9 million and $10.3 million respectively. Fundamentally during the third quarter PNG delivered adjusted EBIDTA performance above the mid-point of guidance.

Both our reported and adjusted results include the impact of an un-forecasted $570,000 charge to earning which is attributable to sub leasing firm pipeline transportation rights.

We secured these transportation rights in 2008 to facilitate our ability to provide hub services Pine Prairie. Due to market conditions during the third quarter we elected that sub-lease one year of the firm transportation arrangement third party at a discount to our contract price. The resulting charge reflects the realization of the 10 months of this sub-lease that extends beyond the current quarter.

Excluding the impact that this charge, our results were slightly ahead of the guidance at mid point. Excluding the impact of this charge, results were near the high-end of our guidance range for the third quarter 2010.

Yesterday, we furnished an 8-K in which we provided operating and financial guidance for the fourth quarter of 2010 and also provided preliminary guidance for 2011. Selected portions of this guidance are summarized on slide 15.

Although our updated guidance includes the few adjustments to reflect our current assessments of market conditions, overall, our guidance for the first quarter of 2010 is basically unchanged. With the mid point of adjusted EBITDA being up a $100,000 over the indicative fourth quarter guidance we furnished in early August.

With respect to 2011, we are in the mid stages of a detail planning process. Accordingly, the 2011 information discussed today is preliminary and subject to refinement as we progress through the annual planning and forecasting process.

As shown on slide 17, our preliminary guidance for 2011 forecasted range for adjusted EBITDA of $66 million to $74 million with the mid point of $70 million. This compares favorably to the $53 million mid point of our most recent guidance for 2010. Our preliminary forecast for 2011 adjusted EBITDA equates to a year-over-year growth range of 24% to 39% or mid point of 32%.

The primary source of growth in adjusted EBITDA is a full-year realization in 2011 of capacity brought online in the second quarter of 2010 and the incremental capacity projected to be brought on line in the second quarter of 2011.

I want to point out that major economic inputs for this guidance range are consistent with our view that storage conditions will remain challenging for the near future with respect to both term storage arrangements and hub services. So, these market conditions improved for acquisitions materialize. There is upside to our guidance.

With respect to our 2011 capital program, we currently anticipate our organic capital investment to range from $70 million to $80 million. The majority of this capital is related to Pine Prairie and includes the installation of compression, leaching activities on Cavern Well 4 and 5, the conversion of Cavern Well 4 to storage serving and various fill/dewater activity. Capital activities at Bluewater include drilling and completion of another fluid withdrawal well.

Before turning the call over to Al, let me address our distribution coverage and our outlook for distribution growth. Our distribution coverage for the quarter was 92%. On a quarterly basis, coverage of less than 1:1 was expected, pending the addition of storage capacity associated with Cavern Well 4 in the second quarter of 2011. This capacity addition is expected to result in a 30% increase in storage capacity of Pine Prairie and a 15% increase in total partnership storage capacity.

The revenue additions associated with this increase in storage capacity in the second quarter of 2011 was a primary driver for the full-year distribution coverage, averaging greater than 1:1 in our one-year IPO projection.

As I mentioned earlier, we remain on schedule to bring that capacity in to service in the second quarter of 2011. And we anticipate run-rate distribution coverage with that same three-month period will be well above 1:1 and will set the stage for a distribution increase in the first half of 2011.

Based primarily on increase in cash flows from our organic growth activity, we continue to target averaging mid-single digit distribution growth even if the current market conditions persist for the next couple of years. We also remained disciplined but very active on the acquisition front and hope to be able to make a positive impact on 2011 and future years of those activities. With that, I will now turn the call over to Al.

Al Swanson

Thanks, Dean. During my portion of the call, I will discuss capitalization and liquidity for both, PAA and PNG, PAA recent financing activity and PAA's guidance for fourth quarter of 2010.

As summarized on slide 18, PAA exited the quarter with solid capitalization approximately $1.3 billion of committed liquidity and credit metrics in line with our target. The committed liquidity I mentioned include approximately $180 million of availability under the PNG revolver.

At September 30, our adjusted long-term debt to capitalization ratio was 49% and our total debt to capitalization ratio was 56%. Excluding the 500 million of notes used to fund inventory, our adjusted long-term debt balance was approximately $4.1 billion. The total debt ratio includes $1.4 billion of debt that support our hedged inventory. This debt is eventually self-liquidating from the proceeds when we sell the inventory. For reference, our short-term hedged inventory at September 30 was comprised of approximately 24 million barrels equivalent with an aggregate value of $1.5 billion.

In addition to these inventory volumes and values which carry as a current assets, we also have approximately 13 million barrels equivalents of linefill and base gas carried as a long-term asset that has a historical book cost of $630 million. Our adjusted long-term debt to adjusted EBITDA was 3.8 times and our adjusted EBITDA, the interest coverage is 4.1 times.

As reflected on slide 19, PAA's long-term debt primarily consists of senior unsecured notes and including PNG's credit facility has an average tenure of approximately 9 years. We have no maturities until September 2012 and 89% of our long-term debt is fixed at an average rate of 6%.

With respect to PNG's capitalization as shown on slide 20, PNG exited the quarter with a debt-to-cap ratio of 23%, adjusted EBITDA, the interest coverage of almost 20 times and debt-to-adjust the EBITDA ratio of 3.9 times.

PNG's committed liquidity was 179 million at September 30. This is subject to covenant compliance.

Moving onto financing activities. In September PAA redeemed 175 million 6.25% of senior notes that were due in 2015 for approximately $180 million. We recorded $6 million charge to earning and due to lower interest rate under replacement note issued; we will realize approximately 4 million in annual interest savings going forward.

Additionally in October, we renewed our $500 million, 364-day test inventory credit facility.

Let me now move onto PAA's guidance of balance of 2010 as summarized on slide 21. Fourth quarter adjusted EBITDA is expected in the range from $275 million to $300 million with adjusted net income ranging from $150 million to $181 million or $0.76 to $0.98 per diluted units.

When added to the first nine months performance, the midpoint of our current adjusted EBITDA guidance for 2010 is approximately $1.07 billion which is 3% higher than the midpoint for the full-year 2010 guidance we provided in February.

Our full year 2010 guidance reflects an estimated 78% contribution from our fee based segments. Taking into account our recent distribution increase and using the mid point of our 2010 guidance range, as shown on slide 22, we currently estimate our full year distribution coverage in 2010 will be approximately 107%.

Distribution coverage for the third quarter of 2010 was slightly less than 1:1, due in large measure to the seasonality of our LPG business which typically generates stronger results in the first and fourth quarters of the year.

With that I'll turn the call back over to Greg.

Greg Armstrong

Thanks Al. For several years PAA has used the third quarter conference call that typically is held in November of each year to provide preliminary guidance for the following year. Generally this information is provided on a more summarized basis than our detailed quarterly guidance but it does include a preliminary range for adjusted EBIDTA, interest expense and cash expenditures and now income taxes.

We are still in the early to mid stages of our detailed 2011 planning process and in addition, as Harry noted during his comments, we remain very active on the acquisition front. Accordingly the 2011 information is very much preliminary and subject to refinement as we progress with annual planning and forecasting process and is also subject to modifications as a result of acquisition related developments or capital market activities.

As shown on slide 23, the preliminary guidance range that we furnished last night in our 8-K filing forecast an increase in 2011 adjusted EBITDA from 1.12 billion to 1.17 billion for a mid point of 1.145 billion. This compares to the 1.07 billion that Al just mentioned for the mid point of our most recent guidance for 2010 and translates into a forecasted adjusted EBITDA growth range of 5% to 9% or a mid point of roughly 7%.

Although we are looking for solid year-over-year growth in EBITDA, we'll point out that 2011 will be somewhat of a transitional year for distributable cash flow as a fair amount of this increase in EBITDA is also by incremental taxes on our Canadian operations during 2011.

You may recall from prior conference call updates on this subject that effective January 1st 2011, our Canadian entities that are passed entities for Canadian tax purposes will become tax paying entities. For U.S. tax purposes, these entities will continue to be treated as pass through entities.

As a result of this and other organizational modifications related to this event, we expect our 2011 Canadian income and withholding tax payments will increase to approximately $30 million to $35 million. We expect future Canadian tax burns will directionally similar in size and will grow proportional to our overall adjusted EBITDA growth. I would note that effective with the 2011 tax year, PAA junior holders will no longer be required to file individual Canadian income tax returns.

From a distributable cash flow per unit standpoint, after the GP's 50% participation the year-over-year increase in tax has worsted to about $0.11 to $0.13 per limited partner unit. This amount is closer to about 3% of the current $3.80 per unit distribution level. The tax PAA pays at the entity level in Canada will generate a foreign tax credit that can be used to reduce the U.S. Federal income tax paid our limited partner unit holders and general partner.

The foreign tax credit will be allocated between the limited partners and general partner based upon the allocation of taxable income for that year. We believe that the LP unit holders will be eligible for a full tax credit for 2011 based on the $0.11 to $0.13 per LP unit I mentioned previously thereby resulting in a meaningful economic after tax or effectively de facto increase in their after tax distribution. This is somewhat like a methodology that is common for investors to convert a tax rate and municipal bond rate to a pre tax equivalent bond rate.

I would point out that if the tax credit for (inaudible) in any given year is larger than there US federal tax obligation from there PA investment the excess cannot be applied to non PA tax obligations but it can be carried out when used to reduce future tax obligations from there investments in PAA.

Accordingly based on our preliminary 2011 guidance, even if the distribution level with PAA were to remain constant during 2011 at the current $3.80 per unit distribution level, many unit holders will receive and equivalent after tax distribution increase of up to 3%.

Because of the significant step up in taxed only occurs during the first year of adoption the year-to-year impact on our unit distributions will be substantially reduced in future years and organic growth projects will generally translate in the direct contribution to distributable cash flow.

Base don the mid-point of our preliminary 2011 guidance which does not include the benefit of any additional acquisitions, we estimate the projected distribution coverage at our current distribution level is approximately 106% excluding the tax increase the same measure would be around 111%.

At the high end of the preliminary 2011 guidance we estimate the coverage will be approximately 112%. Accordingly because of the step up in Canadian taxes during 2011, the performance of our distribution growth on a pre tax basis will be relied on our ability to perform at or above the mid point of our guidance, which will be argumentum by our ability to make and integrate decretive acquisitions.

At the end of 2009 we targeted to grow PAA's distribution over a several year period in the 3-5% range using distribution phase in 2010 versus 2009 PAA increased its distribution 3.7% during 2010. We continue to target to achieve average annual distribution growth in the 3% to 5% range, anchoring our growth outlook for the next several years are our organic growth projects which will be augmented by our acquisition activities.

As you can see from some of the projects I reviewed over the last 18 months we have been working diligently to expand our inventory of organic growth project and its shown on slide 24, we currently anticipate that our 2011 organic – capital program will range through $500 million to $600 million.

By compression the mid point of that range represents a $170 million or 45% increase over 2010 $380 million organic growth expenditures and we are continuing to develop additional expansion opportunities that could add to that range during 2011.

Additionally, we remain disciplined but also very active on the acquisition front and hope to be able to make a positive impact on 2011 and future years as a result of these activities.

We appreciate your participation in the call today and we look forward to updating you on our activities during the fourth quarter call in February. Operator this time we are ready to open the call up for questions.

Question-and-Answer Session

Operator

(Operators Instructions), we'll go to Yves Siegel with Credit Suisse, please go ahead.

Yves Siegel - Credit Suisse

Good morning everybody, I have to honest that's a lot of information to digest.

Greg Armstrong

It's a lot of information prepared.

Yves Siegel - Credit Suisse

So I'll just try to stick to a couple of questions, first when we thing about natural gas storage and the soft economic environment that we're in, overlaid that with that fact hat you have very low expansion cost opportunities in front of you. How should we think about the rates that you are looking for going forward within the context what we just mentioned and within the context of that fact that you will be having additional storage rolling over from Legacy contracts? Does that make sense of that question?

Greg Armstrong

Yeah. And make a few comments as being to jump in. I guess, firstly, we actually have very few contracts rolling over in 2011 and not much in the way of 2012. We get out in 2013-14, we start having some contracts roll over. And then obviously, we have new space that would bring in on in both 11 and 12 that as Dean mentioned we're in the process of contracting portions of that and we're not going to give any real comment on rates there. What I can say is that, and we'd talked about this in the IPO, you know, based upon the tight market, and we're certainly seeing a tight market. We can generate very attractive double digit returns, at costs that we are approaching $10 million per Bcf and the numbers that Dean just gave you, which includes, kind of little bit of fine tuning of our relations. We look at how we best expanded and we slowed down the volume of growth. But we look at the quality of that volume growth.

We can generate 8 Bcf more at roughly $1 and $2 and we can generate an additional 24 Bcf on that in the $6 range. Those economics are extremely attractive even in this low environment. So, we certainly don't want to get into an overbuilt situation and have our capacity unavailable. We don't think that's the case. We're not the price setters for the market. But I think, we're ones that can generate attractive returns even at a tight market for an extremely long period of time.

The analogy would be, if you can hold your breath, we think, we can hold our breath a lot longer than everybody else.

Yves Siegel - Credit Suisse

But I guess the question also is, when you think about the returns, are you thinking about the returns from the total investment or are you thinking about returns on the incremental investments in terms of moving forward?

Greg Armstrong

Both. But primarily because, again, so much of our activity is leased up. We've got two different markets. Again, the Pine Prairie market is different than the market in Bluewater. That one held up very constantly. And that's why we're not too worried about longer term relations up there and in fact, we're generating exactly where we thought we would be in Bluewater, even in this environment. So, it's really Pine Prairie it's the incremental investments and making sure we're not cannibalizing ourselves. But again, we're small factor in the big market in terms of total storage. But I think we're a meaningful factor and becoming more so in terms of the high-performance storage.

Yves Siegel - Credit Suisse

Okay.

Greg Armstrong

So, the answer is it looks good in both cases, both on an incremental and overall. It just looks better for us on incremental and probably just about everybody else.

Yves Siegel - Credit Suisse

Okay. And then if I could, two more questions, and I'll move forward I promise. Dean, the second question is, as you look at acquisitions, could you give a little bit more, just elaborate a little bit more on the, sort of type and size of acquisitions that you're thinking about? And within the context as well of, what type of returns that you think that you can achieve and given the fact that cost of capital has come down a bunch, how does that also play into the thought process?

Dean Liollio

Yves, is your question limited to gas storage or PAA or both?

Yves Siegel - Credit Suisse

It's both.

Dean Liollio

Well, I mean, the acquisition that we're looking, it's really no change in our approach to PAA. It's everything within crude oil and LPG and natural gas storage. So, the nature of the assets we're looking hasn't changed.

We've always been looking normally for assets. But we also look for entity opportunities we've recently increased our management strength here to be able to I think widen our bandwidth to be able to chase more things at the same time and to return to looking forward on – are still in well-above our cost to capital.

Right now, we categorize our cost to capital PAA is probably in the 8% range, may be a little bit higher than that when you're in bet the expectations in future growth in that and PNG is probably may be 125 basis points less than that and so we're looking at transactions that are certainly accretive. I think part of the challenge that we look at is cash flow profile of any acquisition whether it's a PNG or PAA, you know, we've got an expectation of growth.

PNG is a little steeper than PAA simply because of the relatively small size and the significance of the organic growth. So when we look at those acquisitions of PNG for example, we have say what can we do on our own and generate attractive growth for our existing unit other and then also how do we lower our risk or expand our platform and make sure we don't take away from that right of growth and in fact we don't actually add to it.

That's about a combination of accretion measurement and then also right to return because if you think about it, right to return doesn't really give effect to the near-term accretion as you would just I said a total over of our return our standard period of time and these are very long life assets.

So we look at in contact and quite candidly all of this whole units that we all look at it just the way you would look at it is what best for the unit over and we don't want to lose something acquisitions that we make a good headlines but don't make good money but we do want to do acquisitions that people may not initially understand but six months or a year if you look back so – a damn, good move.

Yves Siegel - Credit Suisse

Could you see a transforming transaction in 2011? Is that part of the stuff that you're look at?

Greg Armstrong

There're certainly other MLPs that have made those statements pretty bold about transforming transactions, I don't want to get into that. I do think we've done two MLP mergers acquisitions in our history. I don't think we're done in doing those. I think there are big assets as well as big entities out there to be acquired and quite candidly I think our guys there is good, as a manager team there's anybody out there to be able to not only get our arms around it but to extract at least as much as the seller if not quite a bit more value on top of that. So I certainly wouldn't want you to think to fall up the table. I want to make sure you know it's on the table but I'm not going to make you promises about 2011.

Yves Siegel - Credit Suisse

All right. Thank you very much. Greg.

Operator

We'll go to Brian Zarahn with Barclays Capital. Please go ahead.

Brian Zarahn - Barclays Capital

Good morning.

Greg Armstrong

Good morning, Brian.

Brian Zarahn - Barclays Capital

On your Cushing expansions, the projects obviously is favorable for your fee-based growth. With your competitors also building out storage in Cushing, is there any concern that future can tangle opportunities, may diminish?

Al Swanson

Sure, I'm sure there's possibility. If you look at the way we've designed our facility and we've designed it for – to handle guys that are going to use our Cushing Terminals sort of on operation basis. So a lot of thing had impacted, can tangle and availability of storage of Cushing is certainly one of them.

Greg Armstrong

Brian, I might just point out we're at a little over 14 million barrels right now and going with this new expansion to that 18.5 million barrels. Just use the bigger number because I think that would be your -- 18.5 million barrels. I think we've got 16 to 16.5 million barrels of that is termed out under leases. They quite away into the future and our customers that make up that lease space are all operational users. They don't really use our tanks for -- they optimize their business but that's not why their buying it. And from a functionality and I know you've been to Cushing but just to kind of put it in perspective for those -- others on the call I mean, the total throughput in Cushing is probably in the aggregate volume that moves among all facilities in and out is probably in the neighborhood of 1 million to 1.1 million barrels a day. We have 800,000 barrels a day of throughput capacity through every significant pipeline in and out of there and we've got new and better systems. So we can do all this in different grades and quality. That's why people really to be at PAA's because the functionality -- and we think we give good service by the way at a fair price. When you look at some of these facilities that are being built, there is absolutely no question of significant expansion but as many of those facilities are located far away from the actual interconnect and they've got single lines going from their tank to a manifold. In some cases it's our manifold. But those things have a relatively less lower value. You can put oil it and you can leave it in there or you can take oil out but can't put oil in and out of those at the same time. And so I think those are being built -- our tanks are not being built for contango. They are being built for our customers to operate with and they can be used for contangos.

So I think again at some point in time I don't k now of any market that somehow doesn't get overbuilt at some point in time but ultimately what happens is those that have true value add tend to do much better in that market and we protected our self by a functionality but we've protected our self with having the right customers with long term leases.

Harry Pefanis

The only thing I'd add Brian is your going to have more operational requirements in Cushing going forward. When you look at Keystone bringing some more capacity to bring Canadian crude in, Oxy and (inaudible) were some of their lines that Canadian crude oil Texas. We -- the first one of our lines, just recently to move Canadian crude from Cushing down to Southern Oklahoma refineries. Third party they have done the same. We're originating station for all of those connections. So there is a greater need for operational capacity at Cushing today than ever and piece gets their XL project and that's additional operational storage requirements.

Brian Zarahn - Barclays Capital

I appreciate the color on Cushing. I also have one more question also on storage. Can you comment on additional expansions you're looking at, at your other storage locations, storage hubs?

Greg Armstrong

We are looking at looking at expansions at the 0:03:16 (inaudible). I can say that.

Harry Pefanis

We don't any we aren't doing it down. But seriously we're looking at and certainly have a lot of interest as we said in our press releases and all of our facilities I have to stay tuned.

Brian Zarahn - Barclays Capital

Okay, thanks guys.

Operator

We'll go to Darren Horowitz with Raymond James. Please go ahead.

Darren Horowitz - Raymond James

Hey guys, good morning. Greg, a quick question for you as it relates to St. James. With a lot of the condensate coming up from south of the border and arguably evolving out of the EagleFord, how do you leverage your footprint at St. James to move a lot of that condensate North, either through Patoka or either up North to Canada.

Gary Armstrong

Our last phase at Cushing, we built $900,000 barrels of tankage for handling compound and condensate at Cushing and then St. James and then added 750,000 barrels at Patoka.

Al Swanson

It's not like we position ourselves there and very well for the current market and the one that you forecasted is coming which is – there is going to be a lot more like product on the market. The steps we've taken – we've certainly increased our interest in cat line from 22 to 44, now at roughly 54% and as you said that will be a primary conduit to moving condensate up into Canada and then we've got the tanks, the token tanks at St. James and we have expansion capacity at both places sufficient, I think to double the both.

We do and then we've also added the docket St. James because they aren't capable of handling barges or small ships. I think we're as well positioned as anybody and we need to execute and as Brain asked kind of where we at on some of the things and I just say stay tuned.

Darren Horowitz - Raymond James

Okay. As it relates to the basin system, just kind of a quick house keeping questions, you surpassed the third quarter volume guidance and it looks like now in the fourth quarter you're projecting it to be down about 8% sequentially. What do you see in the South Texas kind of Southern New Mexico market, is there anything that stands out as kind of contra seasonal to you?

Greg Armstrong

What's caused Permian Basin? Is that what you are asking?

Darren Horowitz - Raymond James

Right.

Greg Armstrong

Basically in the third quarter you had a lot of crude commodative tankage in the – actually in the second quarter – I mean third quarter and then the third quarter you had crude commodative tankage that went on base. Fourth quarter we're saying, we would go into tankage, which took some crude of the basin.

So if that happens from time to time, so storage increases or decreases can have an impact on basin, that's really cause of the saying, other than that we're seeing more drilling, more volume in Texas and in New Mexico.

Darren Horowitz - Raymond James

Okay I appreciate it and then just kind of one final for Dean, kind of bigger picture Dean, obviously when you look at your advantageous cost bring on incremental storage capacity at Pine Prairie it would seem like maybe some other feed based complementary infrastructure might be higher on that priority list.

Certainly as you look to become more vertically intergraded and enhance your conductivity, can you give us any big picture, 10,000 foot view what you saw out there?

Dean Liollio

Yeah well a touch on that we always lure in and I think I've spoke on this a couple of times, at our existing storage asset and see what we can do to compliment the – what customers would desire as far pipelines close to those assets, so I would say from a big picture level probably it would be other priority on our list there and would be intrastate facilities that are in close proximity to those existing facilities.

Darren Horowitz - Raymond James

Okay I appreciate the color, thanks guys.

Operator

Next is John Tysseland with Citigroup, please go ahead.

John Tysseland - Citigroup

Hi guys, Greg in the past plains and the consolidator I think of several underutilized crude pipelines as domestic production kind of was in a steady state of decline for a while and now some of these assets underutilized and producers targeting more liquid rich reserves, with there summery showing some growth. Are there any opportunities to bring some of those idled assets back up and where do you think some of those are? Is it West Texas or where do you seek some of those opportunities to bring those assets back online?

Harry Pefanis

Yeah that's a really good question, we see lots of opportunities particularly in West Texas to put lines back in service; we didn't get the call back quiet a bit we had a lot of areas where we had two or three lines in the same corridors. And as we've seen some additional drilling we've gone in, we've tested lines, spent some capital refurbishing the lines, and putting some of the lines back in service. So, it has been a benefit to have sort of right way and the ability to move quickly and put lines in service. Then also point out, that's really what we're doing with what Canada system as well. That Canada system that is currently not in service. It was part of kind of the old eastern corridor system where crude could come down a bit from Canada down into currency. So, that's another area we're taking advantage of having a pipe that is currently not in service and putting into active service again.

Greg Armstrong

And then, some of the stuff that was released on, I think, Tuesday, the mid continent expansion project involved basically optimizing the lines that we have done, some reconnects and increasing capacity, in some cases it may not actually be by reactivating an old line as much as modifying the flow directions and the quality of crude oil in there and the increasing the pump capacity to do that. And then in general, I would say, in Harry's reference, both right away as well the over lines, we've probably taken, I going guess, 3,000 to 4,000 miles of pipe out of service over the last six or seven years.

In some cases, those were economic decisions. In some cases, they were environmental decisions. We would always make sure we run safe heights. And some of these pipes are old. But you when you have the right of way, and as Harry said, when you are basically tracking each other or actually in the same right away, we don't necessary have to activate an old pipe as much as we may have to lay right beside an existing pipe and put a brand new one. And if we have got long-term view on that. So, again, I think we're well positioned to service the market, the need to expand today as anybody.

John Tysseland - Citigroup

And then also, with lot of these plays being more, I guess, associated kind of crude oil production with the gas well. Is there any kind of quality differentials that are going to make tightening some of these new areas out or is there any blending opportunities for you there or batching in their system?

Greg Armstrong

I don't want to get too specific because their in lies some competitive issues. But I will say this. On a geographic basis, there is a likelihood that you are going to end up with too much of a particular quality of crude in a regional area. And you're going to have not only get it away from the well, but you are going to have get it out of the area. And we handle over 300 million barrels a day and can provide a better solution or a one-stop shop to producers that want to get the value at an end market that they might not have direct transportation to.

Harry Pefanis

Yeah, I would want to give you our roadmap of where we think differentials are going to go because you just going to start on your company to compete with it.

John Tysseland - Citigroup

I don't think that's, I don't think words of the. All right guys. Thanks for the detail.

Greg Armstrong

Thank you.

Operator

We have Michael Cerasoli with Goldman Sachs. Please go ahead.

Michael Cerasoli - Goldman Sachs

Thanks. Just a couple of quick questions. On the Wascana reversal is pipeline currently utilized and then separately, do you think the mid continent Bakken projects may offer up many supply and logistics opportunities?

Dean Liollio

The first question is what's Bakken, is not currently in service. It used to move crude south into deep pipeline system. Bute is full with basically with rocky mountain production. So, it's currently inactive. What was the second question?

Michael Cerasoli - Goldman Sachs

Just separately on the mid continent Bakken projects, did you think you will have any supply and logistics opportunities going forward once the projects are on line?

Dean Liollio

I think, we will. Yes. We typically, when we are engaged in projects like that, there are in areas where we already have commercial presence and our supplying logistics groups are very involved in that – in those projects.

Michael Cerasoli - Goldman Sachs

Okay.

Greg Armstrong

And Michael, I just point out that somebody has taught you about – that happens. Some of these stuffs are hand-in-hand because again once you get that takeaway capacity, you've got to get that product to a major hub and then certainly said the increase volumes and varieties of crude or create more and more terminal needs at Cushing, Patoka and St. James.

Ultimately, some of the Bakken for example is being railed all the way down to ST. James. We just activate our rail facility in the third quarter in August. So I'm telling we're again well-positioned there too.

Michael Cerasoli - Goldman Sachs

Okay. And then just probably a little nitpicky but your preliminary 2011 maintenance guidance is around 85 million roughly in line with 2010, 2009. I was just wondering about the stand here and your thoughts on potentially higher regulatory scrutiny following third-party slows earlier in the year?

Greg Armstrong

Is your question – would you – your thought it would have been higher than main?

Michael Cerasoli - Goldman Sachs

That doesn't take into account anyhow your spend, your integrity spending or so on.

Greg Armstrong

Yeah, and I don't want to be too allusive in this comment but I mean quite candid, we better been doing a good job last year if you quote. I think we did put a range this year of 80 to 90 and we have been on a program Michael for some period of time, well beyond what regulatory requirements are to extend the same type or similar type of integrity manager rules to non-regulated types or types to handling and carried by the integrity manager program. And so it's already built into our cost structure. Could that number turn out to be 82 million instead of 90 million or it's going to be 92 million. The answer is sure but I don't think it's going to be far outside that range.

Michael Cerasoli - Goldman Sachs

Okay. Great. And then finally for Dean. How do you expect the expansion around Dawn storage to impact demand for storage at Bluewater?

Dean Liollio

Mike did you – say the first part of that question.

Michael Cerasoli - Goldman Sachs

A couple of competitors are expanding capacity around Dawn storage at the Dawn area and I was just wondering how that may impact your operations at Bluewater.

Dean Liollio

Yeah, right now Bluewater continues to stay cool as far as what we're doing over there. I think there is still a need in that part of the area for more storage. It's really area by area specific but we should be okay with what's on the Board right now.

Michael Cerasoli - Goldman Sachs

Thanks, that's it for me.

Operator

We'll go to Selman Akyol, Stifel Nicolaus. Please go ahead.

Selman Akyol - Stifel Nicolaus

Good morning. On the crude oil imports I know you talked about one tank coming in this quarter as opposed to next quarter. But is there anything else as it relates to your guidance for the decline in the fourth quarter?

Dean Liollio

No, it was simply just kind of a –

Selman Akyol - Stifel Nicolaus

It's just strictly one ship?

Dean Liollio

Yes.

Selman Akyol - Stifel Nicolaus

And then if we talk a look at the St. James expansion, it looks like cost went up there from last quarter to this quarter. Anything going on there?

Greg Armstrong

No. Basically, there are two pieces to the projects and just the one piece have been reported last quarter in that in the other category.

Selman Akyol - Stifel Nicolaus

Okay. And then in terms of, may be I misunderstood this, but the midpoint of your 2011 guidance is – is that based strictly on internal growth projects or you guys also affect during an acquisitions to get to that?

Greg Armstrong

No acquisition based on well, assets we already have, Selman.

Selman Akyol - Stifel Nicolaus

All right. And then last question for me. It relates more to Dean. You guys mentioned the optimization group in your press release. If PNG and I guess is there anymore color on that as its starting to contribute or your outlook for 2011 and then distribution policy at PNG, is that independent of the optimization group?

Al Swanson

Yeah, just give you a quick update. So we expect that group to be functional in December of this year and they will contribute some in 2011, particularly given what the markets show us and so that is baked into our plan. And then the last part of your question?

Selman Akyol - Stifel Nicolaus

Is it related to the distribution policy? Is it independent of the optimization group?

Gary Armstrong

Yeah, said differently, we wouldn't include in the distribution characterizing any home runs or triples or even doubles that they may hit. We're -- they're going to be able to cover their cost -- I bet you make a base level of profit that we would include in every -- your talking in the low yield -- million or two range. With what they -- hope to be able to just keep the market honest against leasing storage and then also have the opportunity when we have periods of volatility to capture incremental upside above that. That incremental upside would not be included in the distribution policy and the mid single digit distribution that I didn't talk about it, it's really based on the base line, not what may happen.

Selman Akyol - Stifel Nicolaus

All right. Thank you very much.

Operator

We'll go to Jeremy Tonet with UBS. Please go ahead.

Jeremy Tonet - UBS

Hi, good morning.

Gary Armstrong

Good morning Jeremy.

Jeremy Tonet - UBS

Just wanted to touch on a couple of the questions I've already asked before. Other teams in the MLP space have commented on increased deal four. Would you agree with this now? Would you say that deal flow has increased the opportunities that are out there and also with the trend of GP consolidation out there, do you see -- do you think that there is going to be an opportunity for PAA to take advantage of that as far as entry level consolidation in the MLP space going forward?

Gary Armstrong

Yeah, on the last one I sure as heck hope so. I think there are some good opportunities out there that we like their business platforms and again I think we realize we could extract equal if not more value if we could acquire right. So those deals are very difficult to do though I should say and -- but we have the ability to work through complicated structures and have done so in the past. As far on deal flow, at the risk of sounding like a broken record, we've been saying this for the last seven or eight years. We're as busy now as we've ever been and we've got more people doing it now than we ever have. So yeah, I have to concur. I think the deal flow has picked up and we're doing our best to keep up with a higher grade and we don't happen to basically say no to certain projects, not because they may not be good projects, just till we've attractive high grade ones that we've achieved.

Jeremy Tonet - UBS

Okay. And then I was wondering if you had any comments as far as refined product demand out there, what your thoughts are in trends? Do you see that improving?

Gary Armstrong

Yeah, I think its going to be tied to the economy and this is not a political space until the elections are over. We just -- we're still looking for the green juice that can actually survive and so refined products demand I think is going to be a gradual increase. At a sudden we'd drop from total petroleum consumption in the '05 to '07 range was probably 20.7 million barrels a day. We're probably in the 18.5 to 18.8 range right now. So that's down quite a bit. But that recovery we think will be a gradual recovery. It will be influenced by government programs; if there are subsidies out there for alternative energy then you're going to see some of that recovery be a little bit slower. You can take it as a way to be a little bit faster.

The one thing I would point out Jeremy and I think the U.S. refineries for all the upgrades they have done has increased there competitive position and we're probably actually right now exporting more refined products, I think now that we have in many, many, many years and the actual net imports are down, so in some cases what I'm saying is even though U.S. consumption may not have been increasing that much, total refinery product generation is actually doing okay base upon exports, that fair enough?

John bombarded the plan this one in particular, so you almost have to grade specific when you talk – product specific when you are talking about refined products in the class.

Jeremy Tonet - UBS

Great that's helpful and then one last question I guess in regards to your relationship with Oxy, do you have any updated thoughts or comments as far as potential joint effort between the two.

Harry Pefanis

We still like them, we think they still like us and we're still having discussion on how best to do win-win situations but I can't comment more than that.

Jeremy Tonet - UBS

Great thank you very much.

Operator

And we'll go to John Edwards with Morgan Keegan, please go ahead.

John Edwards - Morgan Keegan

Good morning everybody, just translate – I just want to make sure I translate your commentary regarding committee and taxes that means your expecting not a strong or perhaps lot of distribution, in 2011?

Harry Pefanis

No, I guess what we're trying to say is if you just looked at a 7% growth using the mid-point and EBIDTA and you assume that we maintain a 101 to 103 coverage, you'd probably come away with a higher growth next year than what will be because we're going to have to absorb about 30 to 35 million of Canadian taxes.

We've talked about that in the past, we've just haven't been able to put a spot of point on the range of the impact I think at point in time we talked we talked about anywhere from 20 to 40 and so from our perspective, you do put that down the takeaways we wanted to make sure that you had John was.

Number one there will be a one year filling of tax returns which is a good thing, two is there will be a de facto distribution increase whether we change the actual pretext distribution or not, the after tax distribution will increase roughly about 3% based upon that range of $0.11 to $0.13 per unit in the form of the tax credit, you're going to file your tax return, you are going to look and calculate your U.S. taxes and then you are going to reduce it about at $0.11 to $0.13,that's map taxed basis, it's the same as the muni bond calculation.

I think if you look at our distribution guidance for next year and the CapEx distribution coverage, at the current level a 380 – we're about 106 I believe it was, if you wanted to say, okay look forget the Canadian tax situation, its already imbedded in the numbers, what will that coverage go near, I think you can go to 390 each range and at a 101 to 102 coverage range and certainly when we think we're at the trough part of the economic cycle that doesn't feel terribly uncomfortable, we're running about 80% speed base.

We're not yet at this point where we can actually talk about distribution growth. The next year we'll give as much guidance as we can on the February call which is when we normally do that. We just wanted to make sure that sooner we start and we got some fine points put on those Canadian tax numbers that we were able to communicate there, because we get a lot of questions John about, how much longer are I'm going to stop Canadian tax returns, or do I have to file or I don't want to but until I don't have to file and so that's a significant statement that we can make today and the other one is, is that we actually been able to quantify the amount of the taxed credit that you would get a put it into what I'd call a fact of distribution equivalent and then the last thing I make on the distribution is we did reiterate today that our target is still to grow 3% to 5% per year on average.

John Edwards - Morgan Keegan

Okay. All right, fair enough. That concludes for me. And then just, I guess the question for Dean, you know, you were talking little bit about the market, in terms of natural gas storage. So, you were attributing it to production and weather. I guess if the weather hadn't been as hot, you would have a greater demand for storage, which would have made it stronger. And then you made a comment also on the production side, that you don't have as much fear, I guess, as you put it. So, I guess, in terms of strength in the market to translate, then to what conditions, do you think, have to be present to make a stronger? Is it simply the opposite of what we've had? Or is that too simplistic?

Dean Liollio

No. I think, you break it down. I think what has happened is, John, your question is good. It's just a confluence of both those things and generally you don't see that if we had one or the other thing, we would have been fine. We certainly, in the long-term I would tell you, our preference is that demand grow over time and it is not supply driven. It just helps the overall fundamental. So, as we go through time, natural gas, in our opinion is still very much in favor.

And we look for that growth, particularly, in the power generation area, and supply will. The market will respond to the pricing and such over time. And we will see that work its way out. I do think it's going to take a couple of storage seasons to work off this supply build up that we have. Producers have at least in our opinion, have yet to blink. But sooner or later, it's going to get painful.

Greg Armstrong

John, just that kind of, elaborate and add just a little bit. I mean, we believe storage has value, whether it's oversupplied or undersupplied and because, quite candidly, if there's too much production and not enough demand, you have to put it into storage. And if there's too much demand and not enough production, you have to store it, you have to bring it in from (inaudible) another thing you have to store it so you have it in the winter.

The bad situation for storage is when you adequately supplied and demand is low, and that's what happening. You still have a summer/winter spread that has a big impact on storage. What happened, the supply was up. What Dean's saying is takes the summer, hitting demand away. And we're probably worried about where we are going to stick out this gas that continues to come at us, takes that excess supply away, and we would have be having, but have the increased heat that we had and inventories down in the summer where people would have worried about running out of gas in the winter. So, I think what solved this is right now there is gas wells that are being drilled for non-economic reasons to whole leases and to the other things. I am not saying that's a bad decision or good decision. I just don't think you can do it in perpetuity.

Because the whole thing you're making money on some of these wells. And so, it would take $2 gas price or 250 gas price and you will start seeing these rigs lay down. And then actually what happens is, the cycle starts all over again. If you give 250 gas prices, you're going to find a lot of industrial and commercial customers who want to use natural gas. They will start driving demand up. We cannot think the rigs are fast enough. So, storage comes back into play. So, I think it's an anomaly. We're certainly prepared for a long storm that could last in the sense that one to two storage seasons what we're guiding you to as we think what it could take for the market to correct itself.

But having said that we had anticipated and prepared and a built a lot of cushion into our distribution thoughts as we set up PNG as we got up here, we tweaked that recently and we're prepared for long hard winters if you will or long hard summers or we're going to look at it and still deliver really good value to our unit holders and if we can all manage with acquisitions along the way, we're much better off when the market turns around.

So we don't think there's a lose situation, it's just a question of how much we win and put a hurricane in the middle of that in about June or July it makes you and you may throw all that out to build and found out you know we got three or $4 spread. We're still going to win. We got a lot of storage and we got a lot of ability to make more.

John Edwards - Morgan Keegan

All right, I appreciate the additional detail and that's all I have this time. Thank you.

Harry Pefanis

Thanks John.

Operator

And we'll go to Joseph Siano with Credit Suisse. Please go ahead.

Joseph Siano - Credit Suisse

Hi, good morning.

Greg Armstrong

Good morning.

Joseph Siano - Credit Suisse

Just to dive a little deeper into your growth CapEx plans. First quickly, is the Bakken North Project included in the 2011 guidance, CapEx guidance?

Greg Armstrong

No, we don't have that specifically in the guidance. Looking at 2011, we got some identified projects, and some portfolio projects that are sort of risk way to get into that project. It's not typically in those –

We probably got right now improved or pending approval probably 400 to 450 million of the 500 and 600 range. If we stop right now the only additional project that we added to that was the Bakken and then number would go up quite in the middle of that range and we have to kill all the other projects. Well, we actually help happens over the next several months and that we crystallize some of these and we'll be able to give you the full detail in February and what makes up. Just saying the number comes in at 525.

We'll give you the detail there on that but here I'm saying is if we have 525, we don't have the Bakken projects in there. If we come back in February with a $600 million number, if it turns there everything else we would have not made it. So I will feel pretty confident about our 500 to 600 range.

Joseph Siano - Credit Suisse

Right, got it. Okay. And then you touched upon several potential different areas that the 500 to 600 – the projects are around. Can you may be give a little bit more color on may be just generally what area is your most excited about or have the largest potential to put the capital of the work or –

Harry Pefanis

It's quite about all. Yeah, each areas because it adds – it's critical land span it's the once cause that from being a potential project or project. So and in some cases, those are negotiations with producers or with customers that we supplied to and in some cases it's competition. So I don't think it would benefit our e-mailer to get in too much detail on that.

Joseph Siano - Credit Suisse

Okay. Got it, thanks.

Harry Pefanis

Thank you.

Operator

And we have no further questions at this time.

Gary Armstrong

I want to appreciate everybody dialing in and on one hand we apologize for the length of the call and the level of information, on the other hand, it makes a lot easier if you know what we know. So we look forward to update you on the February conference call. Thanks.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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