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Plains All American Pipeline LP (NYSE:PAA)

Q2 2007 Earnings Call

August 7, 2007, 11:00 AM ET

Executives

Greg L. Armstrong - Chairman and CEO

Harry N. Pefanis - President and COO

Phil D. Kramer - EVP and CFO

Analysts

Ross Payne - Wachovia Securities

Sam Arnold - Credit Suisse First Boston

John Edwards - Morgan Keegan

Presentation

Operator

Welcome to Plains All American Pipeline's Second Quarter 2007 Results Conference Call. During today's call, the participants will provide forward-looking comments on the partnership's outlook as well as review the results of the prior period. Accordingly in doing so, they will use words such as belief, estimate, expect, anticipate etc. The partnership intends to avail itself of Safe Harbor provisions that encourage companies to provide this information and directs you to the risks and warnings set forth in Plains All American Pipeline's most recently filed 10-K, 10-Q, 8-K, and other current and future filings with the Securities and Exchange Commission.

In addition, the Partnership encourages you to visit its website at www.paalp.com, in particular, the section entitled non-GAAP reconciliation, which presents certain commonly used non-GAAP financial measures such as EBITDA or EBIT, which may be used here today in the prepared remarks or in measures such as... or the Q&A session. This section also presents a reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures that 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 referenced to the financial measures, including the effect of selected items impacting comparability.

Today's conference call will be chaired by Greg L. Armstrong, Chairman and CEO of Plains All American Pipeline. Also participating in the call are Harry Pefanis, Plains All American's President and COO; and Phil Kramer, Plains All American's Executive Vice President and CFO.

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

Greg L. Armstrong - Chairman and Chief Executive Officer

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

PAA generated strong operating financial results for the second quarter 2007. Highlights for the quarter are summarized on slide three. The partnership reported net income EBITDA and net income per diluted unit of $104.8 million, $210.2 million and $0.78 per unit representing percentage changes of 31%, 76% and negative 4% as compared to respective second quarter 2006 results of $80.3 million, $119.6 million and $0.81 per unit. Excluding selected items impacting comparability, second quarter adjusted EBITDA was $214.8 million and adjusted net income was $120.2 million or $0.91 per diluted unit representing percentage changes of 68%, 35% and negative 12% compared to corresponding results of for the second quarter of 2006 of $128.2 million, $88.9 million and a $1.3 per unit.

As indicated in the press release we issued on May 29th, these adjusted results exceed the upper end of our guidance range we provided in our May 20007 conference call. The slide four shows, this marks the 22nd consecutive quarter that Plains All American has delivered results in line with or exceeding our guidance. As mentioned in last call, we completed the integration of Pacific early in the second quarter. Moreover, as reinforced by the partnership's strong first half operating performance and financial performance, and our increased guidance for the second half of 2007, we have achieved a combined run rate level of operating and commercial synergies that will exceed our target synergy objectives for 2007, subject to timing accelerations and delays as well as capital projects substitutions and modifications that are fairly routine for large multiyear project execution. We believe we are on track to achieve our Pacific-related financial targets for future periods as well.

The remainder of today's call will be provided in three main costs. First, we will review; second quarter operating results, address major operational assumptions for third quarter guidance and provide an update on our expansion, capital projects and recent acquisitions. Next, we will discuss our capitalization, liquidity and the depletion finance activities as well as view updated financial guidance and on last, I will wrap the call with a few closing comments on our current performance versus our 2007 goals, provide some insight into our outlooks for the future and also address the recent market transition from contango to backwardation.

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

Harry N. Pefanis - President and Chief Operating Officer

Thanks Greg. Each of our segments performed above the second quarter guidance, we provided on May 2, this year. As shown on slide five, adjusted segment profit for our Transportation segment was $89.4 million or $.34 per barrel, and it was approximately $10.4 million above the midpoint of our guidance range. Transportation volumes were approximately 2.9 million barrels per day; that included pipeline volumes of approximately 2.8 million barrels per day. Our pipeline volumes exceeded our guidance by about 102,000 barrels per day. Although, there were several ups and downs, most of the volume increase was attributable to the Basin Pipeline System. I'd also point out that increased revenues from our Canadian trucking operations and from our pipeline loss-allowance barrels contributed to the over-performance in this segment.

Adjusted segment profit for the Facilities segment was $4.3 million above the midpoint of our guidance range at $31.8 million, or $0.27 per barrel, with volumes of 38.8 million barrels per month. Strong segment results were mostly attributable to the stronger than expected gas storage earnings from our 50% ownership interest in the PAA/Vulcan Gas Storage joint venture.

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

In a moment Phil will discuss our 2007 guidance. This guidance assumes third quarter volumes in the Transportation segment of approximately 2.8 million barrels a day. Estimated volumes for each of our larger systems are shown on slide six, and are generally in line with recent trends. Third quarter guidance for our Facilities segment is based on average capacity of 37 million barrels per month of crude oil, refined products and LPG storage, 12.9 Bcf per month of natural gas storage and 17,000 barrels per day of LPG processing throughput.

Third quarter guidance for our Marketing segment incorporates lease gathering volumes of approximately 705,000 barrels per day, LPG sales of 65,000 barrels per day, waterborne foreign crude volumes of 75,000 barrels per day and refined products volumes of 15,000 for an estimated total volume of 860,000 barrels per day. We expect moderately strong market conditions in the third quarter; however, we expect market conditions to weaken in the fourth quarter.

Our slide seven shows snapshots of the forward NYMEX curves as of June 15th and July

17th of this year. Two trends are apparent from the slide; first we are no longer in a contango market, and the outer month spreads have flattened out. Typically, the market we currently expect in the fourth quarter is most difficult type of market to extract upside value using our risk management strategies. Later in the call, Greg will comment a little more on the effects of a backwardated market on our business. Maintenance capital expenditures for the quarter were $10.9 million. We expect our full year 2007 costs to be $52 million, which is about $7.0 million higher than our original forecast.

Moving forward to our 2007 capital expansion program, as shown on slide eight; so far this year we have completed or nearly completed five internal growth projects. In January, we completed the last 300,000 barrels of our 900,000 barrel Phase I expansion at our Kerrobert crude storage facility in Canada. In February, we placed our 6,000 barrel per day High Prairie Rail Terminal into service. In June, we placed into service the final 1.3 million barrels of tankage at St. James Phase I storage facility and we expect to place our 55,000 barrel per day Cheyenne pipeline system into service around the 1st of September and we also expect to place into service the first 100,000 barrels of our 850,000 barrel tank expansion at our Martinez terminal in September. The remaining 750,000 barrels of tankage expansion will be placed in service in the fourth quarter.

As shown on slide nine, we are proceeding with other major projects, including the 2.7

million barrel Phase II expansion at St. James, as well as the Salt Lake City pipeline expansion and the Ft. Laramie terminal project. We have experienced some weather-related delays at our 3.4 million barrel Cushings Phase VI expansion. We still expect the majority of the tanks to be in service by the end of the year. The remaining portion will come online during the first part of 2008. We also began construction of our Patoka terminal during the second quarter. On the Pier 400 project, we are waiting on the Port of Los Angeles to release the draft environmental impact review.

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

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

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

With that I will now turn the call over to Phil.

Phil D. Kramer - Executive Vice President and Chief Financial Officer

Thanks Harry. During my portion of the call, I will review our capitalization and liquidity at the end of the second quarter, discuss our recent financing activity, share a few comments about our accounting activity that did impact our second-quarter results and then walk through the third quarter guidance and the updated guidance for the full year 2007.

Given all the attention on both the weakness in debt capital markets and the very recent weakness in MLP equity capital markets, I am very pleased to report that PAA is extremely well positioned in both regards as we ended the second quarter with a strong credit profile and capital structure and excellent liquidity. As summarized on slide 10, at June 30th, PAA's long-term debt outstanding was approximately $2.6 billion, while book equity was approximately $3.4 billion and, as a result, our long-term debt-to-total capitalization percentage was approximately 44%.

Our second quarter adjusted EBITDA-to-interest coverage ratio was approximately 5.2 times, and using the midpoint of our 2007 adjusted EBITDA range, our long-term debt-to-adjusted EBITDA ratio is approximately 3.4 times. In addition, our long-term debt has an average tenor of approximately 14.4 years, and we have no maturities of long-term debt until mid-2009, when we have a relatively small, $175 million tranche maturing. We also have excellent liquidity and we recently extended the maturity of our committed $1.6 billion revolver and increased the size of our uncommitted contango facility from $1 billion to $1.2 billion. At June 30th, we had approximately $1.5 billion of undrawn committed capacity available to meet our working capital needs and to fund future acquisitions.

As shown on slide 11, even with over $5.2 billion in cumulative acquisitions and expansion capital investment since the fourth quarter of 2001, we have been within our targeted 50% of long-term debt-to-total cap percentage ratio in 22 of the last 23 quarters. The foregoing metrics exclude our short-term debt and contango-related interest costs. This is because our short-term debt primarily reflects borrowings under our contango facility and revolver for hedged crude oil and LPG, as well as exchange market requirements, and these borrowings are essentially self-liquidating as the inventory is sold and proceeds are used to pay down the debt. Also, our contango-related interest costs are reflected in gross margin as a direct cost of these activities. At June 30, the balance in short-term debt was approximately $890 million, and that's inline with our balance as of March 31st. I might mention that to the extent we remain in a backwardated market, we will significantly reduce our short-term debt balance related to the contango storage.

Our financial growth strategy targets funding at least 50% of our growth capital with equity and excess cash flow, as well as maintaining a prudent amount of equity to support our merchant activities. Consistent with our history of proactively financing our capital needs, in June we issued approximately 6.3 million units in a direct placement for total proceeds of approximately $383 million, including the general partner's contribution. This transaction is consistent with our credit ratings objective and our overall capital structure management as we continue to expand our merchant function, including refined products, and implement our various capital projects, including the construction of approximately 13 million barrels of new tankage, some of which will be utilized by our merchant activities. A portion of the proceeds from the equity transaction was used to fund the acquisition of the Bumstead LPG storage facility and our expansion capital projects and the balance was used to reduce our short-term debt and our inventory-related borrowings.

As we indicated in our last conference call, we have a substantial inventory of internal

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

As shown on slide 12, we are approximately $363 million ahead of our 50% equity in excess cash-flow target. There were three accounting items that I want to address that impacted the second quarter results. First, our LTIP expense for the second quarter was $21.8 million, $19.5 million of which is reflected in the selected items impacting comparability. This compares to our quarterly guidance of $10 million, of which $9.3 million is included as a selected item. Of the $11.8 million total difference, $7.5 million reflects the cumulative impact of a higher unit price on the LTIP liability accrued during prior service periods. The bulk of the remaining difference is related to a $2.8 million accrual triggered by our determination that achieving a $3.50 annual distribution level is now considered probable.

Second, our second quarter net income was also impacted by an approximate $9 million net loss on the sale of non-core assets, the majority of which were acquired in the Link acquisition in 2004. Gains and losses of this type are reflected in depreciation expense, similar to impairment expense. The last accounting item is related to a $10.8 million deferred tax provision recorded in the second quarter. In June, the previously proposed Canadian legislation imposing an equivalent to a corporate entity tax on certain flow-through Canadian entities became law. We believe this legislation will apply to our Canadian activities conducted through our Canadian limited partnership; however, there is some uncertainty as to whether the legislation does apply, and our Canadian counsel is seeking some clarification.

As enacted, certain aspects of the legislation should not apply until the year 2011, unless our Canadian limited partnership exceeds certain normal growth guidelines. Since the law has been enacted, we recorded a deferred tax provision again of $10.8 million as of June 30th, and it's almost entirely related to prior periods and represents primarily depreciation and goodwill book tax differences. I should also note that we conduct a portion of our Canadian activities through a corporation, which is already subject to Canadian income tax. The good news is that generally any tax our flow-through entity pays in Canada will result in a tax credit for our U.S. unit holders when they file their U.S. tax return.

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

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

For the third quarter 2007, we guide you to an adjusted EBITDA range of between $175 million and $195 million, with a midpoint of $185 million. We estimate third quarter adjusted net income will range from approximately $85 million to $110 million, that equates to $0.55 to $0.75 per diluted unit. For the full year, we have increased our adjusted EBITDA guidance range to approximately $760 million to $800 million with a midpoint of $780 million. This midpoint is approximately $90 million higher than the initial guidance we provided for 2007. Again, for additional details and assumptions, I would refer you to the 8-K that we furnished yesterday.

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

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

Greg L. Armstrong - Chairman and Chief Executive Officer

Thanks Phil. We are very pleased with the second quarter results and look forward to the rest of 2007. First, as shown on slide 14, we are well positioned to achieve the five goals for 2007 that we established at the beginning of the year. Second, we believe PAA is well positioned for the future. Specifically, as illustrated by the montage on slide 15, we believe that the combination of our base level cash flow, incremental contributions from our organic growth projects and future distributions from our gas storage joint venture underpin our ability to grow PAA's distribution at an average rate of 7% to 9% per year over the next several years. We also believe that any major future acquisitions will likely extend the period of visibility for continuing that growth trend or serve to offset unforeseen challenges or delays in our capital projects.

Third, as illustrated by the montage on slide 16, we have a disciplined financial growth

strategy and as a result of consistently executing that strategy, we have a strong capital structure and excellent liquidity position that will facilitate the financing of future capital projects and acquisitions.

Before we open the call up for questions, I wanted to spend a few minutes addressing the anticipated impact on PAA associated with a rapid transition in July from a steep contango market to a backwardated market. First, let me provide a little bit of background. Throughout most of the time period from early 2005 through the end of June 2007, we have experienced favorable contango market conditions. A contango market is favorable to our commercial strategies that are associated with storage tankage, as it allows us to simultaneously purchase production at current prices for storage and

sell at higher prices for future delivery.

As Harry mentioned earlier, in July 2007, the market for crude oil transitioned rapidly to a backwardated market, which has a positive impact on our lease gathering margins because crude oil gatherers can capture a premium for prompt deliveries, but provides little incentive to store crude oil as current prices are above future delivery prices. We refer to the interaction between our lease gathering activities and the commercial strategies used with our tankage as counter-cyclical balance, which we believe has a stabilizing effect on our operations and enables us to generate a base level of cash flow in either environment. As a result of the wide contango spreads experienced over the last couple of years and a fair amount of price structure volatility, we have been able to generate not only a base level of cash flow, but in many quarters we have also been able to generate significant additional profitability. At the risk of being labeled sandbaggers, in the guidance we have provided each quarter we have been very deliberate about reducing or eliminating the incremental impacts of these favorable market conditions from our guidance beyond the very near term, as they are unpredictable and very difficult to forecast.

With that as background, in response to the question, what impact will the shift from a

strong contango market to a backwardated market have on PAA's guidance numbers? The answer is, for the remainder of 2007 the answer is, in two words, not much. That belief is illustrated and reinforced by the guidance we furnished last night for the second half of 2007. If you look at the most recent guidance for the second half of 2007 you will quickly see that it is very much in line with and, in fact, slightly ahead of the second half guidance we provided at the beginning of 2007 and again at the end of the first quarter. We have not provided guidance numbers yet for 2008, but I can say that our long-term outlook, upon which we have based our distribution growth targets, is not predicated on a steep contango market. It does assume that there will be a fair amount of volatility and that our assets and our business model will have the opportunity to generate solid results in that environment.

At this point, we see nothing to cause us to change that outlook regarding future volatility. We believe the countercyclical balance provided by our asset base and our business model will enable us to continue to generate a solid base level of cash flow in the current backwardated environment. If the market remains in the current backwardated structure, our future results from our marketing segment will likely be less that those generated during the more favorable periods of pronounced contango, but are still expected to be in line with our base level expectations, upon which we manage the business long-term and upon which we also set our distribution growth targets. I would also point out that in most cases, our profitability during a backwardated market would be enhanced if there is volatility in the pricing structure and we think the fundamental and market related factors suggest we will continue to experience a volatile crude oil market.

I want to touch on two additional related matters before I leave this topic. The first is that the transition to a backwardated market will also have a beneficial impact on our total debt to total capital, as we will be liquidating our inventory positions and the proceeds will be used to substantially reduce our short-term debt. Our short-term borrowings at the end of each of the last four quarters have ranged from $900 million to $1.2 billion. And as Phil mentioned a bit earlier, in the event we remain in a backwardated market, we expect to realize a significant reduction in that balance. The second and final point I would make on this topic is that the impact on EBITDA will be meaningfully less than the amount implied if you were to assume an amount of storage capacity and apply to it an assumed contango spread. Setting aside the issue of getting the capacity figure right, you must also take into account the costs incurred to realize a portion of that spread, including the interest cost incurred while the contango barrels are in storage.

As we've mentioned many times before, we include the interest cost on short-term borrowings for hedged inventory as a cost of goods sold, thus only the margin on the contango transactions are reflected in EBITDA. Accordingly, in the last twelve months, EBITDA from the marketing segment has been reduced by approximately $52 million in associated interest on hedged inventory borrowings. And finally, we want to thank all those who attended PAA's analyst meeting on May 30th. For those that did not attend, copies of the slides used at the meeting and audio recordings of the presentations are available on our website at www.paalp.com.

That wraps up the items on our agenda. Thank you all for your participation in today's call. A complete written transcript of the prepared comments for this call will be posted on our website at www.paalp.com very shortly. You will also have the option to download an audio version. Joe at this time we will open the call for questions.

Question And Answer

Operator

Thank you. [Operator Instructions]. Our first question is from Ross Payne with Wachovia Capital. Please take your question.

Ross Payne - Wachovia Securities

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

Greg L. Armstrong - Chairman and Chief Executive Officer

Ross it varies really by location and it's pretty dynamic changing number right now in... we haven't published that information.

Ross Payne - Wachovia Securities

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

Greg L. Armstrong - Chairman and Chief Executive Officer

Yes while you were... we were conversation here offline, I can't give you the aggregate number. I just don't give it my location but it's in the 55% to 60% range, the tankage is two third parties.

Ross Payne - Wachovia Securities

Okay

Greg L. Armstrong - Chairman and Chief Executive Officer

And to answer your question, to kind of clarify perhaps what I was trying to get earlier, what we call base level results, not the base line plus but what we call base level results which is what we try and manage the business on over to an extended period of time, we do think that there will be offsets to the countercyclical balance. What we are really trying to say is the significant access profits that we get called sandbagger store because clearly the market has been very favorable for about 2.5 years. We are not saying the market won't come back in the more favorable conditions but that's not how we manage the business. We really take that as something that's incremental to the baseline, not a part of the baseline.

Ross Payne - Wachovia Securities

Okay, so you will still be able to achieve your results without that?

Harry N. Pefanis - President and Chief Operating Officer

Hey Ross this is Harry Pefanis. A lot of the people that lease-take they are leasing it operationally, they are leasing it we have not leased, for most leased I can people do the same contango trades. So we don't expect that business to go away just because of the long-term contracts that are operational nature.

Ross Payne - Wachovia Securities

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

Greg L. Armstrong - Chairman and Chief Executive Officer

Again it's going to vary by location but we wouldn't expect that mix to per party tankage. It's the change a whole lot over the expanded credit time. We have some contracts that are short term that have been well for many, many, many years throughout all kinds of markets.

Ross Payne - Wachovia Securities

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

Greg L. Armstrong - Chairman and Chief Executive Officer

Ross, several years ago when a bigger portion of our earnings and cash flow was coming from non-fee base, we have picked a target of what we call debt-to-EBITDA 3.5 or less. When we a couple of years ago started expanding quite aggressively into the pipeline sector, we kind of move it up to go to equal to approximately 3.5 to 1. Today we are a little more comfortable with that number moving up, probably in the 3.5 to 3.8 but it still has a 3 in front of it. I will tell you what you see today is capacity we've raised excess equity, to be able to position for the opportunity that may exist when there is... it's difficult for others to get to the capital markets and we have already in fact pre-funded as Bill mentioned. So I wouldn't take the 3.3 as an indication that we are migrating there. We think in that 3.5 to 3.8 range, we are consistent with our BBB, BBB+ target especially, if we are seeing a higher percentage of our business competency-based activities.

Ross Payne - Wachovia Securities

Very good. Thank you guys.

Operator

The next question is from Sam Arnold with Credit Suisse. Please go ahead with your question.

Sam Arnold - Credit Suisse First Boston

Hi good morning guys. Congratulations on the quarter, a very strong marketing and I was wondering if you could talk a little bit about that. How much of the results could you breakdown were attributable to kind of the issue that you are seeing at Cushing versus St.James. I mean it seems like you guys will probably be able to make a quite a bit of money of that arbitrage that was going on and just trying to find out how sustainable that portion is?

Greg L. Armstrong - Chairman and Chief Executive Officer

It was totally different markets.

Sam Arnold - Credit Suisse First Boston

Right.

Greg L. Armstrong - Chairman and Chief Executive Officer

You were asking was there an arbitrage to be captured between the $5 or $6 discount in --

Sam Arnold - Credit Suisse First Boston

Right. Just as basin volumes were up quite a bit and then with cap line you think there will be a lot of more import volumes coming into St.James and things of nature. So I am just wondering if you guys had a quantity to that because Cushing prices were so much lower than St.James because of all the stuff that was going with McKee and some other refineries downstream at Cushing.

Greg L. Armstrong - Chairman and Chief Executive Officer

McKee definitely helps basin volumes. Even though you have higher prices at St.James basin was still, I mean cap on was still at very high levels and continuously cap line operated at high levels and just for clarification, all that goes into the Transportation segment not Auto nor Marketing segment.

Sam Arnold - Credit Suisse First Boston

Okay. So you don't iterating on that?

Unidentified Company Representative

Yeah, I think that this assumption Sam may be that the barrels are completely tangible and that they... I mean they physically in order to take advantage of those arbitrages that you'll see on the screen, they have to have transportation packet in there as well as the forward curve and the delays associated with the bases differential. So it's probably easier for some traders to create value on the screen than it is in reality and I guess what we are saying is those markets are directly linked. It's not that natural gas towards which is completely tangible and if it's in a pipeline you can back transport it so to speak. You can get it to that operable market and then in this it's more logistical nightmare if you will, which is what makes it very complicated with 50 different grades and varieties of crude.

Sam Arnold - Credit Suisse First Boston

Right, okay, so it really wasn't a big increase in cap line volumes because of what was going on the Cushing is just more import?

Unidentified Company Representative

More imports and then clearly there were some very attractive Contango levels during the second quarter factors that I lined out, I think toward the end of the first quarter, first part of second quarter quite a bit. One thing..

Sam Arnold - Credit Suisse First Boston

Right. But isn't the Contango because of what was going on in Cushing?

Greg L. Armstrong - Chairman and Chief Executive Officer

Partly; I mean the key refinery probably extended the period of Contango but ultimately those markets always remedy themselves. So there has been a big pull down in crude barrels as what one would probably conclude and they are like in can tail over that in the old daily article that what came out today. There's just one thing I would probably just want to make sure by takes away from this is if you recall, even when we had a real strong first quarter when we announced we were updating our guidance for the second quarter, we didn't change the second half of the year. For our respected the market is doing pretty much what we would have thought it would be doing, maybe a little bit faster, but overall, we are only managing for our baseline; when you compare third quarter and fourth quarter, we are actually showing the flat down tick in fourth quarter; that's because some of the Contango activities that transitioned in July; it doesn't really affect you till August in terms of the actual... when you report earnings because you report the value when you have the sale in the quarter, not when you have the Contango spread show up.

Sam Arnold - Credit Suisse First Boston

Okay great. Thanks for the clarification; I appreciate that.

Greg L. Armstrong - Chairman and Chief Executive Officer

Thank you.

Operator

Your next question is from Gilbert Alexander with Delta Associates [ph]. Please state your question.

Unidentified Analyst

Good morning. Sorry to ask this, but I didn't hear although properly. You mentioned you might be going... you will be going to a 350 dividend rate. Do you have target date for that or when it might happen?

Phil D. Kramer - Executive Vice President and Chief Financial Officer

Well actually just to be clear, what we for accounting purposes we require at the end of each quarter we are making assessment of probability and the definition of probability is probably not the same as the layman's definition but it's when we get to the point where it's I think a fair terminology is profound more likely than not and once we get there, it just simply requires us to make an accrual for any equity incentives associated with that level. So now we haven't picked a day that actually got in there. All we are saying is that in for accounting purposes we have reached that threshold. Clearly 350 falls within the fairway of our targeted guidance over time of 7% to 9% but we haven't given any guidance just to try and pick a date for that.

Unidentified Analyst

Thank you very much.

Phil D. Kramer - Executive Vice President and Chief Financial Officer

Thank you.

Operator

[Operator Instructions]. Your next question is from John Edwards with Morgan Keegan. Please go ahead with your question.

John Edwards - Morgan Keegan

Yes, good morning. Greg could you just expand a little bit further on you were talking about how things have transitioned from the contango or the backwardated market and as far as what the contribution to the business has been from contango versus backwardated I mean you did talk about that but trying to get a sense here of you are trying to I guess guide us I think you are saying there is no change to the base outlook when you go to backwardated but I am just... what's the relative contribution to the business when you are contango versus backwardated maybe you can talk about it that way.

Greg L. Armstrong - Chairman and Chief Executive Officer

Yes I think we are really trying to say is and again it's for many, many quarter we outperformed and I going to use that term sandbaggers affectionately. What I guess, what I am trying to say is the guidance that we were providing at the beginning of the year for the year end and even in the future periods extend we were talking about projecting base levels for the Pacific rate assets. In all cases we were really looking at more of a balanced market, not a extreme contango and extreme backwardation. We certainly weren't looking at a flat margin because that's our worst situation where the price of the crude oil is the same in every signal month. Generally that when those happen they are in transition, it won't stay very long. So I guess what I am really trying to get. If you look at our fourth quarter that's where run rate that's a pure forecast based upon what we have seen in terms of the slight backwardated, market not an extreme backwardated, not certainly amount of extreme contango and what we have been experiencing over the last several quarter is one that's both good volatility as good contango. We really can't spike out the amount that we may... and what you might call a pure contago arbitrage because there are several other things that go on intramonth. In some cases we actually, if we get a call from refiners, we need to borrow some of your stories because we got things coming in.

We are developing a long-term relationship, we not may not make as much as those paint barrels as we could have that we simply wanted to if you will be mercenary and so its really difficult for anybody from the outside to calculate what that earnings capacity is and it's difficult for us to share that information without giving in some proprietary information as to how we manage that. The passive state we are an MLP we manage long-term relationships, we manage long-term assets to deliver stable results. That's what we call the baseline in a favorable market like we have been saying, we enjoy what we call the baseline plus we use our incremental cash flows not to raise our distribution but to pay for additional capital that in many cases is investment fee-based capital that takes temporary increases for one that you can't predict and results in repeatable increases just at a much lower level.

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

John Edwards - Morgan Keegan

Okay great and then just housekeeping items. What's the maintenance CapEx outlook at this point?

Phil D. Kramer - Executive Vice President and Chief Financial Officer

The total for this year, we started off with $45 million a current estimate is $52 million. That's within a range of probably $40 million to $60 million. It's probably the number unless we add more assets means. I mean what happens is John, last year I think we were understand as what we have targeted. We had some carryover part of it as a function whether were are certainly forecasting for the second half of the year since its been so late as in the first half that we got to have the opportunity to catch up out some projects.

John Edwards - Morgan Keegan

Okay, great. Thanks a lot.

Phil D. Kramer - Executive Vice President and Chief Financial Officer

Thank you

Operator

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

Greg L. Armstrong - Chairman and Chief Executive Officer

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

Operator

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

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Source: Plains All American Pipeline Q2 2007 Earnings Call Transcript
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