Plains All American Pipeline LP (PAA) 2003 Q2 法說會逐字稿

Welcome to the Plains All American 2003 second quarter conference call. During today's call, the participants will provide comments on the partnership's outlook for the future as well as review the results of a prior period. Accordingly in doing so, they will use words such as believe, estimate, expect, anticipate, et cetera. The law provides Safe Harbor protection to encourage companies to provide forward-looking information. The partnership intends to avail itself of those Safe Harbor provisions and directs you to the risks and warnings set forth in the Plains All American's most recently filed 10-K, 10-Q, 8-K's and other filings with the Securities and Exchange Commission.

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

I will now turn the call over to Mr. Greg Armstrong. Sir, you may begin.

Thanks, Ricky. Let me also say that today we'll also be using some non-GAAP financial measures and we direct you to our Website at www.paalp.com, in particular the section entitled non-GAAP reconciliation that provides a mathematical reconciliation of those numbers. That section also provides a both historical and a current table of items that affect comparability with respect to our reported financial information. We are pleased to have this opportunity to discuss recent results and update you on our activities. This morning we reported net income of $23.4 million or 42 cents per limited partner unit and EBITDA of $42.3 million.

These results were just slightly higher than the high-end of our guidance range we provided on April 25th, 2003, as both segments of our business had strong performance.

On a comparative quarter basis current year results exceeded the second quarter of 2002 results for net income, net income per unit and EBITDA by 38%, 14% and 42% respectively. Net income and EBITDA for the second quarter of 2003 does include a non-cash market-to-market gain of roughly $200,000 due to the impact of statement of financial accounting standards number 133 which is accounting for derivative instruments and hedging activities. Conversely, EBITDA for the - net income in EBITDA the second quarter of 2002 includes a non-cash market-to-market gain of about $1.1 million due to the impact of FAS 133.

Under the new rules with dealing with disclosure of non-GAAP financial information, we were not able to report our results excluding FAS 133 and accordingly in order to insure consistency with the public filings with the Securities and Exchange Commission and to comply with the new rules the non-cash market-to-market impact of FAS 133 have not been excluded from the calculation of net income for EBITDA for either period.

With the exception of those non-cash FAS 133 items there are no significant items to highlight on a quarter-to-quarter or a six-month comparative period.

The remainder of today's call will be broken down into three segments.

First, Harry will provide a report of performance drivers and market conditions at that affected the second quarter performance and then also currently influence our outlook for the remainder of the year. He will also provide a stash report on the performance of the Shell assets we acquired in August of 2002, review two recently acquired completed both on transactions in west Texas and then also provide a status report on our 2003 capital program. Harry will also make a few comments on two smaller acquisitions we completed in areas other than west Texas since our last conference call.

Second, Phil will review our capitalization included at the end of the second quarter, recap our capital expenditures to date and for the remainder of 2003, and then walk through the guidance for the third quarter in our updated guidance for the full year. Phil will also address our preliminary guidance for 2004 and then third and finally, I'll wrap-up with a few comments on our outlook.

As we have done in the past, we will post a complete written transcript of the prepared comments of this call on our Website at www.paalp.com shortly after the completion of this call. If we do not cover something that needs additional discussion or if you have a question about our disclosures in the press release, please feel free to bring it to our attention in the Q&A session. Keep in mind that that we may be restricted in providing the answers in the same format we provided in the past prior to implementation of Reg G, with that I'll now turn the call over to Harry to take us through a performance and acquisition review.

Thanks, I'll make a few comments on second quarter performance on a comparative performance basis our EBITDA increased over 40% as a result of two factors. These factors more than offset the high regulatory compliance cost that burden this year's quarter.

The first factor is that we made several acquisitions that positively impacted this year's quarter increasing volumes in both segments but most notably the pipeline segment. The largest of the acquisitions were the Shell transactionwhich was completed in August of 2002.

The other factor was that strong backwardation and relatively high volatility we experienced in the first quarter of 2003 carried over in the second quarter. I should point out that the completion of the Phase II and Phase III expansions of our Cushing Terminal and the additional tank capacity added to the Shell acquisition enhanced our ability to take advantage of the volatility that existed in this quarter.

Our consecutive quarter basis these items largely off set seasonal affect of lower LPG margins in the second quarter of 2003 as compared to the first quarter of 2003. Greg asked me to continue to provide you with a status report on the integration and relative performance of the Shell assets until such time as we have owned these assets for a full year reported their performance for a full year under all our operations.

As you may recall, at the time of the acquisition we outlined a three-prong strategy to increase cash flow from these assets by approximately 25% over the pre-acquisition levels. The strategies consisted of one, decreasing costs, secondly, increasing through put on the base and pipeline system and the Permian Basin gathering system and then thirdly, integrating excess tankage into our commercial strategy. Pleased to report that we're ahead of our implementation schedule and well on our way to achieving the target objectives of this acquisition and continue to pursue opportunities to increase cash flow associated with these assets.

On the first item as I reported in previous calls we completed our cost reduction efforts and they are in line -- they were in line with our expectations. We regarding the second point, through put on the base and pipeline system, average 280,000 barrels a day during the quarter. And that compares with an average of approximately 210,000 barrels a day in the first quarter of 2003 and our guidance of 260,000 barrels per day in the second quarter of quarter or the second half of 2003.

We also completed the connection of an additional 30,000 barrels of day to a Permian Basin system. Approximately 20,000 barrels a day was connected in June and the remainder was connected in July with the completion of a fairly significant extension on the northern part of our system. As a result we expect to average volumes on the Permian Basin system to increase in the third quarter.

The volumes will generate tariff revenue -- these volumes will generate tariff revenue on the Permian Basin system and potentially they are candidates on the shipment of the basin pipeline system. Finally, the excess tankage from the Shell acquisition has been integrated into our commercial strategies. It's difficult to isolate the exact contribution from this incremental tankage. As we manage a combination of our lease crude supply with our tankage.

Operationally we completed the purge of Rancho System in late April and all the [lines]has been displaced. In late June a combination sale and swap transaction involving our ownership in the Rancho pipeline system. Pursuant to this transaction, we transferred our approximate 50% interest in just over half of pipeline in exchange for $4 million cash in the assignment to us of the remaining 50% ownership and approximately 1 million barrels of tankage in west Texas.

The balance of the pipeline system is subject to a third-party purchase option and if not exercised we have arranged for it to be salvaged at no incremental cost to us. As a result of these arrangements we now own 100% of the 1 million barrels of storage capacity previously associated with the Rancho System. No gain or loss was recorded on the shut down and sale. Also during the quarter we completed two additional full-time acquisitions in west Texas that we believe directly complement the assets we acquired from Shell.

First, in early may we acquired an 8.8 interest in the Mesa Pipeline System which is a 24-inch, 80-mile pipeline which extends from Midland to Colorado City.

The purchase price was approximately $3 million. As a result of this acquisition, we now have the ability to move approximately 28,000 barrels a day on our interest in the pipeline. I should point out that the Mesa System can deliver crude oil to the Basin Pipeline System at Colorado city.

The second west Texas acquisition involves the purchase of the Iraan to Midland Pipeline System from Marathon Ashland Petroleum. These assets are comprised of 95-mile, 16-inch pipeline system that extends from the Yates Field to Midland, Texas. This system was originally constructed by Map (ph) in 1970 in the early 70's as an alternative route to the Rancho Pipeline System with respect to transporting the crude out of Yates Field.

This asset represented an attractive opportunity for PAA as a result of the shutdown of the Rancho Pipeline System. We anticipate overall volumes on this system will increase relative to historical levels in that these volumes will become candidates for potential shipments on our Basin Pipeline System. This system has the ability to deliver crude oil to both the Basin and the Mesa Pipeline Systems.

And let me wrap-up the discussion on the Shell assets by providing a few comments on our assumptions for the remainder of 2003. While we are obviously very pleased with the second quarter volumes on Basin, it's still too early to draw definitive conclusions on the level of sustainable volumes we will see over a prolonged period of time. Accordingly, Phil's guidance for the third quarter and the remainder of the year incorporates a forecast of approximately 270,000 barrels a day for the Basin System. This is higher than the original base level forecast of 260,000 barrels per day but below the average actual level second quarter through put of 280,000 barrels per day.

As a point of reference, each 10,000 barrels a day varies on the Basin System has an approximate annualized impact on gross margin of $1.4 million or roughly $350,000 per quarter. Also since our last conference call, we have completed two additional acquisitions for total consideration of approximately $18 million plus working capital requirements. In mid June we completed the acquisition of a package of south Louisiana terminal and gathering access from El Paso Corporation and its subsidiaries. These assets included interest in five gathering systems and two terminal facilities which in the aggregate comprise 131 miles of crude oil and compensate pipelines and gathering systems and 76,000 net barrels of storage capacity.

These assets complement our existing activities in south Louisiana and we believe will help leverage our exposure to the growing volume of crude oil and condensate (ph) production from the Gulf of Mexico. During June we also acquired an underground propane facility in Michigan. This acquisition will further support the expansion of our LPG business in Canada and the Northern tier of the U.S. We expect to realize varied synergies from acquisitions by combines the facilities feed base storage business with our wholesale marketing expertise. In addition, there may be opportunities to expand this familiarity as LPG markets continue to develop in the region.

Also, the acquisitions that I mentioned complement our existing activities in the respective areas and our game plan is to integrate this into our existing operations. We estimate they'll take about six months to fully integrate these assets into our operations and increase cash flow to our targeted run rate levels. I might point out that two of the four transactions were included in the pending but unnamed acquisitions incorporated into our guidance at the beginning of this year while the other two are identified but not incorporated.

In a few minutes Phil will discuss our revised guidance for 2003 during a preliminary guidance for 2004 both of which incorporate our outlook for these assets.

To complete the discussion of our 2003 acquisition activities, we have now fully integrated the two acquisitions, we completed the first quarter of this year both in the field and in the back office and we completed the connection of our Red River system to our Cushing Terminal.

In addition, we remain on schedule to more than double the through put of the Red River Pipeline System by upgrading section--sections of the pipe during the first half of 2004. Before I turn the call back to Phil, let me comment on the market conditions. Deep [activation] in the crude oil market has subsided quite a bit after July and as a result market conditions for gathering the marketing business are currently not as strong as they were for the first six months of 2003. The guidance Phil is going to share with you reflects a continuation of these current market conditions.

However, such guidance also reflects the uplift in volumes on the Basin Pipeline System and the Permian Basin gathering system that I discussed earlier and the phase in of the anticipating [inaudible] from the recent acquisition and the optimization activities.

I'll now turn the call over to Phil.

Thanks, Harry. The second item on the agenda today is to discuss our capitalization and liquidity at the end of the second quarter and that data our financial guidance for the balance of 2003 and I'll specifically do that for the third quarter of this year.

We'll also provide some very preliminary guidance for next year, 2004. We ended the second quarter in a very favorable position relative to each of our metrics in our targeted credit profile. Our original guidance for expansion capital for 2003 called for capital expenditures of approximately $83 million. This included three acquisitions for which discussions were well-advanced at the time of our conference call in February and included as I said in the guidance.

Since the beginning of the year, we have completed the three acquisitions included in the guidance as well as three incremental acquisitions with aggregate purchase prices of approximately $49 million. Thus our current estimate of expansion capital for this year has increased to $132 million.

I will note that routine midyear modifications of our other expansion projects resulted in only minor adjustments to our aggregate estimates. As of June 30th we had incurred approximately 84% or a $111 million of the expansion capital and that is reflected in the balance sheet in either our debt or our working capital balances at the midyear point. The remaining $20 million will be incurred in the last half of this year.

Our original forecast for maintenance capital was approximately $8.5 million for this year and that still looks to be a good estimate. As of June 30th, we had incurred about half of that amount. Also at the beginning of the year, we anticipated adding approximately 1 million barrels to our crude oil line fill and that was principally associated with the base pipeline system.

With the additional acquisitions and some tweaking of the estimates, we now estimate that we will add approximately 1.3 million barrels of line fill for the year and approximately 875,000 barrels of which had been added June 30th of this year and again it's including in the balance sheet either debt or working capital balances. I will note that the line fill additions do not reflect an aggregate of about $5 million of balance sheet transfers from operating inventories to line fill and foreign exchange adjustments to line fill attributed to our Canadian operations.

We maintain our balance sheet strength by experiencing stronger than forecasted operating performance in raising net equity proceeds for approximately $64 million in March of this year. In addition, as part of our credit risk management activities, as of June 30th, we had received approximately $50 million in advance cash payments from third parties.

The proceeds of which were used to temporarily reduce our balances under our revolving credit facility. As a result of these factors, our debt to total cap ratio at the end of the quarter, June 30th, was approximately 47% and our EBITDA to interest coverage ratio for the quarter was over 4.5 times.

In addition, based on the midpoint of our revised guidance for this year, our forward-looking debt-to-EBITDA ratio is around 3.1 to 1. All three of these metrics compare favorably to our target credit profile.

When you exclude the reduction on our debt balances that were associated with the advanced cash payments that I just mentioned, we still would have been inside of our targeted credit profile. Our liquidity position was also exceptionally strong.

We had an aggregate available liquidity in our revolving credit facility at the end of the quarter of approximately $410 million and an additional $150 million that were available at other facilities.

With those comments on our financial position and liquidity, let me take a few comments or make a few comments on our financial guidance for the rest of this year.

On February 26, we issued a form 8K that set forth EBITDA guidance for 2003 in the range of $158 to $164 million. That resulted in a mid-point target of approximately $161 million of EBITDA.

As a result of the strong performance in the first half of the year the tweaking our outlook for the remainder of 2003 to take into account the items that Harry just reviewed, we have revised our guidance now we expect EBITDA for the full year to be in the range of $171 million to $178 million.

That results in a midpoint target of approximately 174.5 and that is an increase of about 8 % of our original midpoint guidance for this year. In our February conference call we provided some very preliminary guidance on our expectations for next year EBITDA as well. That was roughly $168 to $170 million again with the midpoint of $169 million.

That represented a 5% growth over the original midpoint guidance for this year of $161 million. While it's impossible to predict market conditions for next year based on a less robust marketing environment that we have experienced thus far in 2003, we will increase our preliminary EBITDA guidance for next year to a range of $171 million to $178 million. That excludes the impact of any incremental acquisitions or strong market conditions and it also assumes a 7% decline in OCS volumes transported on the All American Pipeline.

At the midpoint of that guidance for next year is $174.5 million, which is flat to the midpoint of the updated guidance for this year and it represents a year-to-year forecasted growth of 8% over the midpoint of the original guidance we provided back in February for this year. Specifically with respect to the third quarter and the full year of 2003, our guidance is based on the current state of the market, reasonable expectations, volumes and expense levels as well as our judgments and assumptions about the potential associated with our business development activities where the outcome is less than certain at this point, including estimated earning on contributions for recent small acquisitions.

As we did last year at this time, we caution you there is a higher variability associated with forecasting our fourth quarter performance due to the impact of weather can have on our seasonal LPG business.

Considering this, we guide you to an EBITDA range of $41 million to $44 million for the third quarter at the midpoint of $42.5 million. Based on estimated gross margin excluding depreciation of $53.4 million to $56 million. We also estimate third quarter G&A should be approximately $12 to $12.4 million.

For interest expense purposes we anticipate average step balances of approximately $565 million resulting in interest expense of $9 million to $9.2 million using a weighted average interest rate of approximately 6.4% which includes our hedges and revolver commitment fees. our forecast of average debt balance assumes a decrease in the level of advanced payments from the $50 million I just mentioned to approximately $20 million. This decline in the advanced payment reflects the conclusion of several short-term deals, and some improvement in the credit quality of certain counter parties.

Finally we estimate DD&A to be approximately $11.8 to $11.9 million, and based on these estimates we would forecast net income of $19.9 to $23.2 million and that equates to approximately 35 to 41 cents per limited partner unit. Our forecast for maintenance capital during the remainder of the year is approximately $4.2 million, which combined with the first half spending will aggregate the $8.5 million with the annual estimate that we provided earlier.

We do expect the majority of the second half maintenance capital to be spent during the third quarter. Our updated guidance for the year 2003 and the assumptions associated with that guidance are set forth in detail in the 8-K that we filed this morning. I will note that our earnings per unit guidance that we provided at the beginning of the year did not incorporate the addition of additional equity.

As a result of the equity offering that we completed in early March we now have 52.2 million units outstanding versus the original forecast of 49.6 million units outstanding. In addition, the previous guidance was based on the $2.15 per unit annualized distribution rate that was in effect at the beginning of the year. Subsequently we raised the distribution to an annual rate of 2.20 per unit effective at the first quarter distribution. As a result, the general partners allocated additional income equal to the incremental portion of the incentive distribution which applied to the updated unit account works out to about $220,000 per quarter. The revised guidance incorporates the change in the capital structure and the distribution rate.

Then finally, consistent with our past practice, we do not attempt to forecast any potential impact related to a statement of financial accounting standards, number 133 as we have no way to control the forecast accrual prices on the last day of each quarterly period. The quarterly, the guidance I provided for the quarter excludes any potential gains and losses associated with the -- with this accounting statement. For more detail with respect to assumptions used in the guidance please refer to the 8-K we filed this morning. With that I'll turn the call back over to Greg.

Thanks Phil. Let me add just a few comments to Phil's discussion to our liquidity and capital structure. One of our constant challenges that we face as a management team is how to balance between, you know, our cost of capital, which directly affects our current distribution capacity and the second item would be maximizing liquidity and financial flexibility which in turn directly affects our ability to move quickly and decisively to consummate transactions we think are strategic and complementary to the business strategy as well as accretive to our unit holders.

In response to this ongoing challenge, we often have to make judgments about current and future market conditions and the likelihood of us successfully consummating potential acquisitions we have targeted. We are committed to maintaining a healthy and conservative capital structure and financing significant acquisitions with the balance of debt and equity. In the past we have raised both equity and debt capital in advance of an acquisition transaction or transactions. In essence pre-funding our growth each time we do that the immediate impact is an increase in our cost of capital and a reduction in our immediate ability to raise our distribution.

While we may -- some take issue with that approach we're executing what we think is a well-defined business strategy in building a business, we believe it's a prudent and a proven financing practice and that in the long run it'll yield better results than just trying to raise capital on a just in time of a financing approach. Obviously, any time we raise capital in the absence of an in-house transaction, it is our intent to re-deploy that capital on incremental acquisition opportunities. In that regard we are constantly involved in acquisition opportunities.

I will caution though that if the market gets droppy (ph) because of either easy access to capital or it turns into a seller's market and there is a corresponding lower of entry barriers for potential midstream competitors, it may become difficult to acquire quality assets for a value we deem prudent.

We will only make acquisitions we believe are accretive for our unit holders and will not grow for the sake of growth alone. I pointed this out simply because the market has certainly risen quite a bit for many of our MLP creditors and it appears that there are lower entry barriers.

Let me close the prepared remarks by stating we are well positioned to achieve our 2003 goals. At the beginning of the year we established a target to achieve a 23% year-over-year growth in EBITDA and to grow our distribution by 2% to 4% by the end of 2003 and both cases excluding any significant acquisitions that were not included at the beginning of the year forecast.

Our performance today and our guidance for the remainder of the year suggests we are on track to exceed our EBITDA objective and we have already delivered 2.3% increase in the distribution. This has been made possible by the fact that the capital we have invested in acquisitions and expansion activities is generating returns or is ahead of expectations and that our business model continues to perform well in volatile markets. This wraps up the items on the agenda. We would like to thank you all for your participation in today's call. For those have joined late, a complete written transcript of prepared comments for this call will be posted on our web site at www.paalp.com very shortly and operator, Ricky, at this time we're prepared to open the call up for questions.

Thank you, ladies and gentlemen, the floor is now open for questions. If you do have a question or a comment, you can press one followed by the four on your touch-tone phone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Once again, ladies and gentlemen, that is one followed by four to register a question at this time. Our first question comes from David Fleischer from Goldman Sachs.

Great quarter and I guess my first question, two parts, is if -- can you help us a bit to understand how much of the strong results in the second quarter came from the benefits of the backwardated market versus all the other factors that you talked about, you know, you were, what, four cents, I believe, above the midpoint of your guidance from April and most of it is -- most of that deviation is in the gross margin lines. So that is the first part.

Secondly, you know, assuming or what are you assuming basically as far as this backwardation staying, continuing for the balance of the year? I think you said you look at the current market,which is backwardated. I presume that is in your guidance, this current backwardated market as opposed to no backwardation. Is that correct?

Yeah, Dave. Let me point out that the biggest contributor if you look at it on a sequential quarter basis is the pipeline margin was up quite a bit I think on a consecutive basis it was up almost 20%. Part of that is because we got better volumes in OCS. I think we were two or three thousand barrels comparatively better. Our daily basis and those are our highest margin barrels. Certainly the volume increase associated with the Basin Pipeline System, I think we had forecasted 260 is what we had in our original plan for the year. We came in actually at about 280 and so part of that - a large part is on pipeline.

There certainly was on the marketing side on a comparative quarter basis, this quarter to last quarter, there's quite a bit of margin improvement and part of that is simply because there was a lot of volatility and our hedging practices allow us to capture that as we talked in the past in fact you were visiting with us one time about how we interchangeably use those tanks. I think the -- Harry, do you want to quantify the dollar contribution?

I would say it's roughly about $1.5 million benefit in the second quarter.

Over what we originally the forecast?

Right. The question really to some extent, David is while we certainly take the current state of the market into effect when we look at the rest of the year, we can't predict what will happen in terms of volatility. I will tell you personally and this is not the company's position but just personal observation is that as we end up with fewer and fewer storage tanks because of some of the regulatory issues that are out there, a tighter spread between supply and demand, which we're certainly seeing, you know, I think the volatility factor is going to continue to be relatively high but trying to project that quarter-to-quarter is tough. I think I'm more comfortable with it over an 18-month period.

But the good news is we're positioned to really cash that in the marketing side or the terminalling side and so, you know, the volatility is actually a welcome concept to the way we run our business.

Absolutely. That is good to see that you made some of this on the backwardated market. But, you know, a good part of it from other factors that you've talked about here so that is nice. Second question relates to the interest side and cost of debt.

And I guess I'd like for you for just update it sounds like your expectations have not really changed but I would like Phil to update us on where you stand there on your fixed versus floating where you talked about wanting to be, you know, kind of 50/50 in the past and, you know, essentially given how much your balance sheet has improved and really these ratios are terrific. I'd love to hear you characterize your discussions with the rating agencies and how they're viewing your ratios and credit currently. And, you know, given the trend of your credit and where you are, what your thoughts are as rates have bounced up as your credit has improved. Where you stand in terms of how you want to structure your debt and, you know, interest, you know, waving between the fixed and floating going forward.

Dave, this is Phil. It hasn't changed since last quarter. We probably are 60% fixed. We have the senior notes and then we have some hedges outstanding on our floating rate debt that is about $100 million. So about $300 million of our total debt is locked in or the interest on that is fixed. That is probably lower percentage than a lot of the MLPs out there but within our targeted guidelines. Probably if we were to do anything it would likely increase over that.

Debt markets are obviously good and as you mentioned interest rates have gone up a little bit just recently but still it's long-term capital is better than what it historically has been. For us to do it would be opportunistic probably. We have a lot of flexibility on our current debt structure, debt revolvers. But like I said, it hasn't changed. It's about 60%. If it was to go anyway it would probably increase slightly, the fixed portion of that.

Specifically, David, I guess the kind of comments I made in closing kind of allude to I think the issue you're directing toward is, you know, if we wanted to we could certainly lock in additional 10-year money at historically attractive rates relative to what we could do by leaving that in our bank facility. It's going to increase our cost of capital and one has to ask the question, why would you want to do that? And the issue becomes one of flexibility and preparing for the next transaction. So we're looking right now at certainly some very attractive debt markets.

We also will be approaching as you notice our revolver still has about a year and a half left to go on it so by the end of April, next year it actually will cause any balance of outstanding to become current. Typically we roll that and the reason that we haven't at this point in time is as you might surmise we're having discussions and at least have had discussions how with the rating agencies how do we get into a solid 6-B, right now we're a 5-B and we could debate whether we should be there or not and I don't think that would do us any good.

I think we could draw our own conclusions but we ultimately have to convince the rate agencies we deserve to be a solid 6-B and we think certainly in the middle not just at the lower end of the rating of the 6-B. The continuation is being strong and it will earn us points ultimately to get there and so we've got, you know, three or four issues.

We've got attractive equity markets, we've got attractive debt markets, we have the upcoming need to modify our revolver at a minimum to extend it. The question is do we go unsecured. All of those right now are actively under discussion and analysis to come up with the best solution that minimizes the pain of increasing the cost of capital to lock in flexibility and then position ourselves to be able to take advantage of opportunities to use that flexibility to make accretive acquisitions.

So I'm not trying to avoid your question as much as I think address the question is, your question probably surmises are we seriously thinking about trying to increase the amount of fixed rate debt that we have? Yes. We're trying to involve that into an analysis of how we optimize that to maintain optimum flexibility, minimize cost and give the greatest certainty to the capital structure. A little help from the rating agencies right now wouldn't hurt us at all.

Thank you.

Thank you. Our next question comes from Ron Lundy (ph) of A. G. Edwards.

Yes, I had a couple of questions here. Could you give us a little more flavor on the current acquisition arena from some MLPs we hear there is a lot of properties for sale and from others we hear there are a lot of properties for sale and they also expensive and others we hear there is not very many properties for sale. Give us a little feel for what you're seeing out there.

If that was A, B & C, I would respond all the above, Ron, there are certainly a couple of pending transactions out there that are known visibly. Any time a company engages in one of those transactions they sign an agreement that says we cannot acknowledge that we're involved in it. So, you know, the question really is, is it there debt to those properties that are out there? You know, I think over the next 18 to 24 months we're going to continue to see properties put on the market and so I would tell you that the acquisition outlook is positive in terms of supply.

Is it as good today as it was 12 months ago? Probably - not only because some of the transactions have already occurred, but there's, you know, clouds forming 24 months out that say there could be some additional acquisitions precipitated into the arena.

Some of the majors that have merged are going to be rationalizing their assets. Some of the mini majors will also be doing the same thing. They're going to be focusing in on core properties. The thing that is a little bit alarming is we would like to see discipline amongst the rest of the buyers so that we don't see acquisition multiples get high and it turn into a sellers market. What normally catalyzes sellers to - buyers to push their valuations up is cheap capital and that works as long as you can marry the acquisition opportunity with the chief capital back-to-back them.

So from our standpoint we've targeted, you know, the $200 million to $300 million a year. This year we have been able to do about $80 million so far. We're actively pursuing several others. Whether we'll be the successors in that or not is a function of, you know, how our bid compares to others. Usually the way we distinguish ourselves is through synergies because we stay focused in a fairly narrow area of crude oil - crude oil related assets allows us to bleed our synergies into the purchase price, which allow us to give the seller a reasonable value, perhaps even fair market value that is on the high side but still give an attractive accretion to our unit holders. Where that can be stolen away from us is if we're competing against somebody who thinks so that 1.5% liable will stay forever or the market will value equity at sub six percent equity based on momentum. We're a little apprehensive right now. I think the transactions that will be announced over the next six months will determine where that trend is going.

We hope it stays, you know, the same and not really trying to dodge your question. I think there is plenty of potential supply out there. It is just a question of whether or not we're going to get our fair share and it's going to be a function of some extent how competitors for those opportunities run their calculators.

You have one of your straws now stuck in the Yates Field. Can you give us a feel how your position relative to the other pipelines takeaway capacity from the Yates Field? We know that, you know, there is some quite a bit of CO2 enhanced recovery going on there, production is probably going to be moving up somewhat over the next few years and how can you take advantage of that?

Well, all of the crude will have to initially leave on a segment of our pipeline. We have the only line that connects up into Macame (ph) station. From Macame there are a couple of alternatives. We have two of the straws out of Macame. I think two of the three straws out of Macame.

There used to be four. That's where Rancho hooked up.

Rancho used to take, of course volume south and that is no longer an operation so it reduced the alternatives -- the important one I think we had the two straws that take one of the straws that takes it to the Midland market, Ron, and that is clearly the most liquid in the area. There are regional markets out there, specifically going into individual refineries. There is a danger of somebody locking up their crude long-term to any one of those simply because if there is a disruption at that particular market, you're stranded with crude back at, you know, at the market's whim really.

Ultimately I think if the projections are right that you're going to see increased CO2 you're going to see increased volumes and we think a lot of that again is possibly going to end up in the Midland market which will end up hopefully as a candidate on our basin pipeline going into Cushing. I think if you go back and you look at the overall strategy of us establishing a footprint in west Texas back in '99, the pipeline side and then subsequently with the acquisition of Basin, the acquisition of Yates, the Iraan system, you can see we're putting together I think a fairly competitive mosaic that allows us to deliver to the producers the best market alternatives and then to the refiners to deliver the most efficient transportation route.

We really serve two masters. Ultimately we have to make the producers happy and we've got to make the refiners competitive. I don't know anybody is better positioned long-term as far as with multiple markets and transportation alternatives than we are.

Final question. There is a proposal out there to reverse BP's line that goes basically from Chicago into Cushing. I think it's called the Spearhead Pipeline reverse the capacity and bring crude from Chicago or Canadian crude into Cushing. How do you view that that as affecting you in your Cushing operations?

At the end of the day it's positive if you can bring more crude into Cushing. I mean, ultimately, Ron, if you bring anywhere near the kind of volumes that we saw on the same announcement I think you're referring to, you know, you're going to have to have more internally capacity into Cushing. We clearly have the best position to expand our terminal facility as well as the fact that there is a lot of tanks that were there that are very, very, very aged.

I think there were three verys in that aged description and so, you know, ultimately if you recall the strategy that we outlined in 2000 when we announced that we were going to attempt a entry into Canada and the fundamental issue was one, that we believed that there was going to be battle for pad to market supremacy and it was going to balance imports primarily through Cushing on the incremental barrel against imports from Canada into pad two and I think that announcement just simply reinforces that everything we, you know, believe was going to happen is in fact happening.

Ultimately it should create for - you know, if it happens as they forecast a very liquid market, another, you know, key batch of the state of crudes that will be coming in. I will tell you that we would probably view it just so that you don't jump your model up 20% over our previous forecast with caution, I think it's a longer term developing issue. I would be amazed if -- if anything happened within the next year and probably not surprised if it took three years for that to actually manifest itself into something that was tangible enough to be able to measure. Wouldn't you agree with that?

I would agree.

It's not something that is, quote, right around the corner. But having said that, you know, even if you look at our presentations and our slide, you know, forecast, I mean, we're anticipating over the next five years there is about, you know, 500 to 700,000 barrel increase in net imports coming in from Canada and I think this is simply the recognition that they have got to go somewhere. We really don't care where the crude comes from the south, through Cushing or from the north through Cushing as long as it ultimately needs to be able use our services which is to provide terminalling services for refiners.

Where are you currently on your utilization of your header capacity in Cushing?

We've got a lot of no pun intended head-room in that. We built that facility to be able to handle roughly 800,000 barrels a day of capacity and we felt that that could support the depending on the number of turnovers per tank, you know, in excess of 10 million barrels of tankage. We have currently 5.4 million barrels constructed. We have a permit pretty much on stand by all the time to bill all the barrels and I think our through put for the second quarter was right around 200,000 barrels.

So if -- if you measured that and that is -- it is going to be higher in the backward market and lower in the container market obviously because in a container you're storing as opposed to pumping over. But basically, that just simply says we could go to four times our current capacity on the header and at least double our current capacity on the tanks.

And I think we were giving ourselves a lot of room when we said 10 million barrels we think actually we can support much higher than that because we got direct interconnects into each of the main pipeline facilities in Cushing at maximum transmission rates and nobody else has that. So again, we're -- anything that happens in the industry that could bring more crude to Cushing, you know, we're a supporter.

OK, thank you.

Thank you. Our next question comes from Stephen Erico (ph) of Locust Wood Capital.

Good morning, how are you today?

Great.

Thanks. I'm new to the story so if you could just explain something. I know you mentioned you spent about $110 million on expansion cap ex this year but yet your basically forecasting EBITDA to be equal next year as it is to this year. Is that because you've had such your other businesses have been so strong this year? And then maybe could you tell me what type of return you're looking for on your expansion cap ex and thirdly could you talk about what type of organic growth you might have inherent in your business?

Yeah, let me kind of recap a little bit on capital expenditure. We started off the year what was targeted to be about $83 million of what we called expansion cap ex. Some of that was carryover capital from projects that were started last year, organic growth where we were actually building our Phase II and Phase III expansions in Cushing, which we finished up in the latter part of '02 and early '03. In fact we're still painting some tanks even though they have been in service for sometime.

And, so, we originally had $83 million forecasted and that was going to be married to the original EBITDA forecast where it had a midpoint of approximately 161.

We identified, and that included three of the six acquisitions, because we already had those either under contract or so close we felt we needed to go in and include them in our forecast since we had handshakes on it. We completed three additional acquisitions and if you note the difference between our original forecast for the year and Phil's revised numbers in the conference call, that -- they're all associated with the three incremental acquisitions which are the Iraan purchase, the Yates acquisition and then the Alto, which is the underground storage for LPG.

So, you know, now our revised forecast for, you know, next year is up from I think original shadow guidance we gave was from 168 to 170 and so you called a 169, now we're talking about somewhere in the mid one 170's. I think you are seeing the benefit of those in the numbers for the coming years for the incremental capital. What you also saw this year that we did not include in our forecast is a fairly robust market in the first six months that we hope continues to occur and again I mentioned or made the comment on volatility.

I think if it does occur we're well positioned to capture it and hopefully that will be incremental to the numbers that we've given you. It is just hard for us to forecast something that we cannot control and therefore I would rather under promise and over perform than I would over promise and under perform and have you be mad at me because I could not forecast what we couldn't control anyway.

And what type of coverage ratio are you guys comfortable with on your distribution?

You know, with our capital structure that we have, which is fairly conservative -- when you rank PAA notwithstanding the rating agencies numerical rating if you look at our credit stats, we're one of the most solid capital structures out there and because of that we think we can sustain a little bit skinnier coverage. We have not actually put a magical formula out there but I would tell you that we would target each time we looked to raise the distribution to be thinking 12 months out even with the increased distribution that we be covering somewhere in the 102 to 105 range.

OK.

And, you know, that is net of maintenance, cap ex, et cetera, that is in our forecast. One other thing that I also should mention and it kind of got glossed over although it was specifically identified is, we're also anticipating something we can't control but we want to make sure that we forecast the caution and that is, you know, OCS, which is a fairly major contributor, I think we forecasted next year that the volumes will decline 7% versus the volumes this year and with that in mind, that in and of itself is somewhere around, you know, 3 or 4 -- $3 million EBITDA hit.

Hopefully if that doesn't occur and then that is incremental -- depletion is part of the nature of our business and to ignore it would be a little bit foolish. When we put our numbers together we not only show you the ups that are associated with things we spent that we think are smart investments but we also show you the downs an we give it to you on a net basis.

Thank you very much.

Thank you.

Once again, ladies and gentlemen, that as a reminder if you have a question that is '1' followed by '4' on your touch-tone phones at this time.

We do have a follow-up question coming from David Fleischer of Goldman Sachs.

One more here. I would like for you to go back and talk about the synergistic acquisitions you're making, the [inaudible] acquisitions, because when you made the Shell acquisition and others in the past, you know, kind of the new acquisitions, you paid and you had to pay a pretty hefty price to get them and yet the logic was you can cut the cost, You could grow them.

But also you could add assets to them and so you've made a number of those in the first half of this year and I'd love whatever guidance you are willing to give us at this point on these handful of acquisitions you made including like the $10 million El Paso one in June and then the others.

And in terms of what multiple of EBITDA you paid on some of these or the basket of them all might be easier for you to tell us based on their historic numbers and then if you could just tell us on these, you know as a package, what you see is the potential increments from the synergies that you can leverage and therefore, you know, what you're forecasting 12 months out or 18 months out, you know, the actual multiple of EBITDA paid would be?

David, to the extent that we've got cash flows either coming from decreased expenses or from increased revenues, the numbers, you know, we have tried to incorporate into what we would encourage you to view as our financial guidance and we kind of always of focus in on the midpoint. We give a high and low because to try to get precise in our business is difficult.

But we think we can frame it up and hopefully we'll do no worse than and hopefully as good as if everything works our way and in reality over time it will probably be closer to the midpoint. So the increments that are associated with those are into the numbers that we've talked about.

As far as -- and I think I am simply reiterating comments I made in either the last phone call or the one before that is the both on acquisitions that we had looked at given what we can extract from the cash flows of the assets is in the 6 to 6.5 range. That may be one that is at 7 and one that is at 5 but it averages somewhere out in that range which for us is a very attractive capital put to use. And part of that is because of our footprint in a particular area. Certainly when we bought Basin we got bigger in west Texas and we're able to eliminate some cost that others would have that we won't have.

Those are synergies that come out of those bolt-on transactions and, you know, we're -- those are numbers--are stand-alone from the synergies, David, that we forecasted to get out of the Basin because I think we were looking for a 25% increase in cash flow on the Basin Pipeline irrespective of these both on acquisitions and then you have the both on in the 6.5 range on the EBITDA multiples and very minimal incremental maintenance cap ex. These are pretty clean pipelines.

OK. Thank you.

Thank you.

Gentlemen, I'm showing no further questions in the queue at this time.

It's been about an hour. I thank everybody for attending and we look forward to updating you in our third quarter conference call that will come either, probably at the latter part of October. Thank you very much.

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may now disconnect your lines at this time and have a wonderful day.