Plains All American Pipeline LP (PAA) 2003 Q3 法說會逐字稿

Welcome to the Plains All American Pipeline's Third Quarter 2003 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 the prior period. Accordingly, in doing so, they will use words such as believe, estimate, expect, anticipate, etcetera. 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 in forth in Plains All American Pipeline's most recently filed 10-K, 10-Q, and 8-Ks, and other filings with the Security and Exchange Commission. In addition, the Partnership encourages you to visit the Plains All American website at www.paalp.com, in particular, the section entitled Non-GAAP Reconciliation. That presents a reconciliation of certain non-GAAP financial measures that are commonly used, such as EBITDA and EBIT, and that they may be used here today in prepared remarks or in the question-and-answer session to the most directly comparable GAA [sic] financial measures. This section also includes a table of items that affect comparably with respect to the Partnership's reported financial information.

Today's conference call will be chaired by Greg L. Armstrong, Chairman and Chief Executive Officer 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 EVP and Chief Financial Officer.

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

Thanks, Laura. Good morning to everyone. We are pleased to have this opportunity to discuss recent results, update you on our activities, and share with you some thoughts on our outlook for the future. This morning, we announced third quarter operating results that, excluding the charge related to the vesting of restricted units, came in solidly in the upper half of the guidance range we provided on July 29 of 2003.

We reported third quarter EBITDA, excluding the LTIP accrual of $40.1m, which, when adjusted for a $2.9m non-cash mark-to-market loss due to the impact of SFAS 133, equates to EBITDA of approximately $43m. This compares favorably on an apples-and-apples basis with our guidance range for the third quarter of $41-44m, which as stated in our guidance 8-K, did not include the effect of SFAS 133 or the impact of LTIP vesting related to the anticipated conversion of subordinated units to common units.

The conversion of subordinated units to common units itself is not in and of itself an income statement item. However, as we have discussed in prior conference calls and in our filings with the SEC, the conversion of subordinated units into common units is one of the triggering events with respect to the vesting of restricted unit grants outstanding of the Partnership's long-term incentive plan.

In many cases, the conversion of many subordinated units is only one of several triggering events, such as distribution level, the length of service, or the length of service required for vesting. Under GAAP, we are required to recognize an expense when vesting of LTIP units becomes probable, as determined by management at the end of the quarter.

Based upon our financial performance during the third quarter, we anticipate meeting the financial tests required by our Partnership agreement for the conversion of 25 percent of our outstanding subordinated units into common units. The actual conversion is expected to occur shortly after we make our distribution to unit holders on November 14. Accordingly, even though the majority of the units that comprise the $7.4m accrued charge will not actually vest until February of 2004, it was determined that we met the subjective assessment of probability as of September 30, 2003, and accordingly, a $7.4m accrual was recorded for the third quarter.

In our public filings, we had initially projected that the charge associated with the vesting of the LTIP units would occur in the second half of 2003 or the first half of 2004; however, due to the complicated nature of the test and the somewhat subjective nature of the accounting rules, we were not able to quantify the exact amount of the charge or identify the exact period during which the charge would be taken until after the end of the quarter.

Under GAAP, we will also face a similar situation at December 31, 2003 with respect to additional restrictive unit grants that may become probable at vesting if the Partnership meets the required test to trigger conversion of the remaining 75 percent of the outstanding subordinated units, which would then convert to common units. Using the same methodology, however, the potential exists for us to record an additional charge in the fourth quarter for restricted units under the LTIP plan that would be considered probable vesting even though a majority of those units won't vest -- would not vest under those circumstances until May of 2004. Phil will walk you through the projected income statement impact of the potential accrual later in the call.

One last point to offer is that these accruals will be trued up with the final actual charges based upon the unit price in effect on the actual date of investing, and any difference would be booked in the period of actual vesting.

With that somewhat long introduction, on a comparative quarter basis, excluding the actual compensation charge, our current-year results exceeded third quarter 2002 results for net income and EBITDA by 18 percent and 23 percent, respectively.

Net income and EBITDA for the third quarter of 2003 includes a non-cash mark-to-market loss of $2.9m due to the impact of Statement of Accounting Financial Accounting Standards Number 133, which is Accounting for Derivative Instruments and Hedging Activities. Conversely, net income and EBITDA for the third quarter of 2002 included a non-cash, mark-to-market loss of $0.4m due to the impact of FAS 133. In addition, our third quarter results included a $200,000 loss on early extinguishment debt as a result of the early retirement of a portion of our outstanding term debt. Phil will go into more detail later in the call with respect to how this translates into our other financing activities.

At the risk of overkill on the subject, I just want to reiterate that fundamental operating performance for the third quarter was solid with results in -- coming in above the midpoint of our guidance range. The $7.4m LTIP accrual is old news. The P&L charge is a result of conversion of subordinated units, and the related vesting of the unit grants have been repeatedly disclosed and discussed in our various public filings and conference calls since as far back as 2001. The only real new development in that regard is that the criteria for meeting the subjective probability assessment was reached at the end of the third quarter.

Included in the press release and also on our website is a table that summarizes the items that affect comparability between corresponding periods. We will also insert a copy of this schedule into the written transcript of today's prepared remarks that will be available on our website, so it'll all be in one place.

During the course of today's call, we want to share with you several important points --

First, our business is performing consistent with our business model, which is underscored by our solid third quarter performance that compared favorably to published guidance.

Second, our acquisitions are being successfully and timely integrated, both in the field and in the office, and we are realizing our projected revenue and cost-saving synergies from each of our acquisitions.

Third, we have an exceptionally strong balance sheet and have access to attractively priced capital, which puts us in an excellent position to continue to expand organically and make accretive complementary acquisitions.

Fourth, we believe there are a number of attractive midstream assets that will be available to be acquired over the next several years.

And, fifth and finally, based on our long-term view of the North American crude oil sector and our unique and strategic positioning, we are optimistic about the Partnership's future performance beyond the current guidance periods and our ability to maintain and grow Partnership distributions.

If we do our job well today, the information and comments we will share during the remainder of the conference call will support and reinforce these five important points.

For those listeners that are unfamiliar with our conference call procedures, we will have a question-and-answer period following our prepared remarks, and a complete written transcript of the prepared comments for this call will be posted on our website at www.paalp.com shortly after the completion of this call.

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

Thanks, Greg.

During my part of the call, I'm going to provide a review of performance drivers and market conditions that affected third quarter performance. I'll also provide comments on activities and market conditions that currently influence our outlook for the remainder of the year. I'll wrap up with a few comments on our acquisition integration activities and our recently announced acquisitions and also update you on the status of significant capital projects.

Let me start off by making a few comments on the third quarter performance. As Greg stated earlier, excluding the compensation charge, on a comparative basis, our EBITDA increased 23 percent. The increase was primarily due to four factors --

First, we completed several small acquisitions at the end of the third quarter of 2002;

Second, last year's third quarter only included two months' contribution from the Shell assets;

Third, we had increasing volumes in our pipeline systems; and

Fourth, the completion of our Phase II and Phase III expansions at our Cushing terminal contributed to the overall improvement of our financial results.

Overall, our pipeline transportation volumes for the quarter were ahead of third quarter guidance. In California, our OCS pipeline system averaged 59,000 barrels per day, and that was about 1,000 barrels per day below our guidance for the quarter. But shipments on our San Joaquin Valley system averaged 77,000 barrels a day, which was about 13,000 barrels a day over forecast. Our guidance for the fourth quarter incorporates OCS volumes of 58,000 barrels per day.

Tariff volumes on our share of the Basin pipeline system averaged approximately 301,000 barrels a day, which is about 11 percent higher than we had forecasted for the quarter. Basin tariff volumes averaged 210,000 barrels a day in the first quarter of 2003, which was essentially in line with the forecast and was originally forecasted to increase to an average of 260,000 barrels a day for the last three quarters of the year. As a benchmark, performance in the second quarter of 2003 was approximately 280,000 barrels a day on the Basin system.

There are a number of factors that can impact the volume on the Basin pipeline on a short-term basis, including refinery turnarounds or problems, and while it's difficult to quantify, we believe that refinery-related issues had a positive impact of about 30-40,000 barrels a day on the Basin system during the third quarter of this year. We're expecting fourth quarter volumes to be approximately 250,000 barrels a day, and in 2004 to be in line with our longer-term estimate of 260,000 barrels per day. The 260,000 barrels a day in 2004 is incorporated into the financial guidance Phil will cover during his portion of the call and represents an average for the year, as I’m sure we'll have quarters that could be in the 240-250,000 barrel range, and likewise, quarters that could be in the 280-290,000 barrel-a-day range.

As a point of reference, in the current operating envelope, each 10,000 barrels per day variance has an approximately annualized impact on gross margin in the range of about $800,000 per year.

In the aggregate, volumes on our other pipeline systems were generally in line with to ahead of our forecasts for the quarter. And rounding out the discussion on third quarter results, our aggregate volumes of gross margin and gross profit from our Gathering, Marketing, Terminalling and Storage segment were generally in line with our expectations for the quarter.

Beginning in September, the steep backwardation that existed for most of the first eight months of the year has subsided. We expect that these weaker market conditions to continue for the remainder of the year and as a result market conditions for the Gathering and Marketing business are currently not as strong as they were for the first three quarters of 2003.

The guidance that Phil's going to share with you for the first quarter of 2003 reflects a continuation of these market conditions for our Gathering, Marketing, Terminalling, and Storage segment.

The guidance for 2004 is based on what we consider to be a normally backwardated market. It is not as strong as the first eight months of 2003 but is stronger than we're forecasting for the fourth quarter of 2003. Guidance for 2004 also incorporates the phase-in of contributions anticipated from our recently announced acquisitions and the continued integration of acquisitions made earlier in the year.

I also want to comment on the August 14 blackout of the electric systems that occurred in the Midwestern and Northeastern portions of the U.S. and Eastern Canada and will impact our fourth quarter. This blackout caused shutdowns at a number of refineries in the affected region, which, in turn, caused crude oil pipelines within regions to run slower than normal and caused crude oil to back up into the crude oil feeder systems in Canada and ultimately back into fields. Our pipeline facilities were not directly impacted by the August 2003 blackout, and there was minimal adverse impact on our operations in the third quarter. However, as a result of reduced pipeline shipments and the impact on differentials within our Canadian operations, we currently anticipate that the indirect impact of the blackout will have an adverse impact on our Canadian operations in the fourth quarter of 2003. It's difficult to quantify the precise financial impact of these disruptions; however, our guidance reflects a current estimate of the adverse impact on fourth quarter earnings and cash flow at $1m.

What I want to do next is provide you with an overview of our acquisition activities, as well as a status report on our integration activities. And during each of the last six conference calls, Greg and I have talked extensively about the Shell acquisition, our integration exploitation plans for these assets, and the relative contribution to reported results, and as clearly indicated by the increased tariff volumes on the basin system and the aggregate financial results, these assets are performing well.

Since we now have substantially a full year's activity with these assets, including our historical results, I don't intend to repeat the details discussed in previous conference call[s]. Going forward, we'll continue to spike out information with respect to the Basin Pipeline system, which was a principal asset acquired in the transaction.

Suffice it to say we're very pleased with the results, we're very much appreciative of the sacrifice and the contribution our employees have made in making the acquisition and the exploitation plan an unqualified success.

Since the beginning of the year, we've also had three complementary bolt-on acquisitions in West Texas, one of which was forecasted in our initial guidance for 2003 and the other two were not. These assets have been integrated into our operations and back office systems and are performing as expected. Each of these smaller acquisitions is complementary to our presence in West Texas and further enhances our ability to better serve our producer and refinery customers. We have also completed the integration of two other acquisitions that we closed during the second quarter in other parts of the country. Those acquisitions were the El Paso assets, which were located primarily in Louisiana, and also the LPG storage facility acquired in Alto, Michigan.

At Cushing, the plan to interconnect with the Red River's Pipeline system to Plains All American's Cushing Terminal was completed on August 1. We also activated an idle section of this -- of the Red River System in the third quarter. We expect most of the remaining modifications, which include replacing selective segments of the pipeline, be completed by the end of the third quarter of 2004, and the net result of these changes will enable us to more than double the volumes on these lines.

Since our last conference call in July, we have announced one additional acquisition and disclosed that we are in advanced discussion on a second acquisition for a total consideration of approximately $70m.

The first of these two recent acquisitions was completed in late September and involved the purchase of the ArkLaTex's pipeline system from Link Energy, formerly known as EOTT. The ArkLaTex system consists of 236 miles of gathering and mainline crude oil pipelines that originate in Northern Louisiana and transport crude oil west into Texas into markets in the Longview area. The system has the ability to deliver crude oil to the local refining market, Mid Valley Pipeline system, and the McMurrey Pipeline system. In addition, the ArkLaTex system is also connected to our Red River Pipeline system. The ArkLaTex system currently transports approximately 18,000 barrels per day of predominantly sweet crude oil. The assets also include approximately 590,000 barrels of crude oil storage capacity located along the system.

In September, we disclosed that we're in negotiations on a second crude oil pipeline and storage acquisition that is complementary to our existing asset base at a purchase price of $40-50m. We signed a letter of intent with the seller and are in advanced negotiations with respect to a definitive purchase and sale agreement. Although we can't guarantee a successful conclusion to the negotiations, both parties are committed to resolving remaining issues, and we anticipate closing the transaction by the end of the year.

With regard to other capital projects, in October, we completed the construction of two 100,000-barrel crude oil storage tanks along our Permian Basin Gathering System, west of our Odessa Station, and we're also building three 80,000-barrel tanks at our Midland tank farm, which should be complete in December. The cost of these two projects is approximately $14m, and the cash flow benefits are included in our guidance. The new tanks will enable us to better serve [our] Permian Basin customers.

In addition, we're currently evaluating the potential expansion of a segment of the Basin pipeline system that from Colorado City to Cushing, Oklahoma. At times, the pipeline has operated at levels that are close to its current maximum throughput. We would like to be in a position to handle increased volumes if market conditions warrant. The expansion is very low cost, about $1.5m; however, the incremental operating expenses would be higher than our current operating costs as we'd have to reactivate pump stations that are currently idle.

On other item to keep your eyes on relates to the OCS production volumes in offshore California. In early October, Plains Exploration and Production announced that they had received all the necessary permits to develop a portion of the Rocky Point structure that is accessible from the Point Arguello platforms. Based on their public disclosures, it appears PXP will commence drilling activities in the first quarter of 2004. Although it's certainly possible, it's unlikely that this drilling activity will have a significant impact on our current volume forecasts for 2004. However, it is something to monitor closely, as it could have a notable impact on volumes in 2005 and beyond. Our 2004 guidance assumes aggregate volume for the California OCS production of 55,000 barrels a day, and that includes production from the Santa Ynez and the Point Arguello platforms. Consistent with our prior methodology, this represents an approximate 7-percent decline from our projected average for 2003 of 59,000 barrels per day. Our guidance also includes our expectation that the tariffs on this line will increase approximately 6 percent in 2004.

And, finally, our fourth quarter guidance includes an increased level of expenses associated with the pipeline spill that we experienced early this month in a remote area of Mississippi. An unfortunate series of events, a large pine tree fell into another pine tree, which, in turn, hit another pine tree, causing it to fall onto a raised pipeline crossing this band of small creek. The tree severed the pipeline, causing approximately 350 barrels of oil to escape the line. Our pipeline control center detected the product delivery imbalance, and the pipeline was shut down, and responsible personnel were deployed to the location. After briefly surveying the situation, the personnel initiated a large-scale response effort to contain this bill and commence clean-up and recovery operations. Because of the remoteness of the spill location, we currently anticipate that we will incur $1m in the fourth quarter to clean up this bill. So while not without its challenges, all in all, it's been a very busy and productive nine months, and we expect it to remain that way for the foreseeable future.

And with that, I'll turn the call over to Phil.

Thanks, Harry.

During my part of the call, I’m going to review our capitalization and liquidity at the end of the quarter and discuss our recent planned financing activities. In addition to that, I'll also want to briefly recap our capital expenditures year to date and for the remainder of this year and then walk through our updated guidance for the fourth quarter and then the full year of next year -- or full year of this year, I’m sorry. Then I'll conclude with some preliminary guidance for next year.

We ended the third quarter with an exceptionally strong balance sheet really by almost any measure. Our debt to total cap ratio at the end of the quarter was approximately 39 percent. Excluding the LTIP accrual, our EBITDA to interest coverage ratio for the quarter was approximately 4.6. In addition, based on the midpoint of our preliminary EBITDA guidance for next year, our forward-looking debt-to-EBITDA ratio is around 2.5 to 1 and would've been approximately 2.8 to 1 if you add the anticipated purchase price for the pending acquisition to our debt balance at the end of the quarter.

As it did last year, our quarter-end debt balance reflects the benefits of advanced cash payments from third parties that we use to mitigate credit risk. At September 30, approximately 40m of advance payments were used to reduce the debt balances, compared to 47 million in advance payments at June 30. Excluding these advance payments, our debt-to-total cap ratio at September 30 would've been approximately 44 percent, and our forward-looking debt-to-EBITDA ratio would've been about 3.0 to 1 in both cases, including the impact of the pending acquisition. I would point out that under either scenario, all of these metrics compare very favorably to our targeted credit profile. In our opinion, these metrics overwhelmingly support our current credit ratings and our belief that we should be given serious consideration for a credit upgrade.

Our liquidity position at quarter-end was also exceptionally strong with aggregate available liquidity under our revolving credit facilities of approximately $450m, an additional $126m available on other facilities.

Both our balance sheet and our liquidity position were significantly strengthened by an equity offering completed in early September. We sold approximately 3.3m common units at a public offering price of $30.91 per unit, and that resulted in net proceeds to the Partnership of approximately $98m net of operating expenses and including the general partner's proportion of capital contribution. Net proceeds from the offering we used to reduce debt outstanding on our various credit facilities.

Yesterday, we announced that we launched a transaction to replace our existing secured credit facilities with new unsecured credit facilities. The new facilities will include a total of $750m of unsecured revolving credit facilities, including facilities for our U.S. and Canadian operations, of which $455m of the facilities will mature in four years, $170m of the facilities is a 364-day facility with a five-year and one-day term-out option, and the remaining $125m is a 364-day facility.

Fleet Securities and Fleet National Bank are acting as Lead Arranger and Administrative Agent on these facilities, respectively. In addition, we will have a $200m secured, uncommitted, hedged inventory facility, which we will use for contango inventory transaction. This latter facility will be secured, but it will be secured only by the crude oil purchased under the facility and the corresponding accounts receivable generated by the sale of accrued. These new facilities are structured to accommodate our anticipated organic and acquisition-driven growth and provide confirmation of a significant improvement to the Partnership's overall credit quality.

I also want to point out that in connection with the refinancing of our existing facilities, we will likely realize a non-cash loss on early extinguishment of debt for unamortized debt issue costs associated with the old secured facilities.

We have forecast a non-cash charge of $3.3m for the fourth quarter, but the precise amount of any such loss is dependent upon several facts that we won't know until closing, and we expect closing to occur in the fourth quarter.

In addition to the ArkLaTex acquisition, the close in the third quarter, and the pending acquisition that is subject to the LOI, there have been a few changes to our 2003 projected capital expenditures since our July conference call. Our current estimate for maintenance capital expenditures is approximately $6.9m, of which approximately $5.5m was incurred as of the end of the quarter. This new total compares to our July 29 guidance of $8.4m. Including the two acquisitions we discussed, expansion capital for 2003 is now estimated at $211m, of which $147m was incurred as the end of the quarter. This compares to our previous estimate of approximately $200m as adjusted for the two acquisition transactions and tweaking of various other projects. The largest remaining expenditure relates to the pending acquisition.

In July, we also estimated that we would purchase approximately 1.3m barrels of linefill for the year. Including the additional acquisitions and ordinary course of business changes, we now anticipate the linefill purchases will total 1.7m barrels for the year, of which approximately 1.3m barrels had been added at the end of the third quarter as is reflected in our debt working capital balances as of that date.

Let me now shift to a discussion of the Partnership's financial guidance for the fourth quarter of this year, the full year of 2003, and the preliminary full year 2004. Our guidance is based on the current state of the market, reasonable expectations of volumes and expense levels, as well as our judgment and assumptions about the potential associated with our business development activities, where the outcome is less than certain at this point including estimated contributions from recent and pending acquisitions. As we did last year at this time, we would caution you that there is a higher variability associated with forecasting performance for the first quarter and fourth quarter of each year due to the impact that weather can have on our seasonal LPG business.

For ease of comparability and to maintain focus on fundamental operating results, I will address the potential accounting charge associated with the potential vesting of the LTIP grants, as well as the potential loss on the early extinguishment of debt in connection with our refinancing our credit facilities separately at the end of this section.

Excluding any LTIP-related charge or loss on early extinguishment of debt, we would guide you to an EBITDA range of $41m to $45m, or a midpoint of $43m for the fourth quarter of this year. Primarily for the reasons Harry discussed earlier, this range is approximately $1m below the previous guidance we provided and is based on estimated gross margin, excluding depreciation, of $53.4m to $57m. We estimate fourth quarter G&A should come in at approximately $12-12.4m.

For interest expense purposes, we anticipate average debt balances of approximately $495m during the quarter, resulting in interest expense of $7.9 to $8.1m using a weighted average interest rate of approximately 6.4 percent, including our hedges and revolver commitment fees. Our forecasted average debt balance assumes a level of decrease in the level of advanced payments from $40m to approximately $25m.

Finally, we estimate DD&A to be approximately $12.1m to $12.3m. And based on these estimates, we forecast net income of 20.6 to $25m. That equates to 37 cents to 45 cents per unit.

Before I address the potential charges to the fourth quarter, let me also spend a few minutes addressing some very preliminary guidance for 2004. We are currently in the middle of our annual planning process for next year and anticipate sharing more detailed guidance with you on our February 2004 conference call. In our February 2003 conference call, we provided preliminary EBITDA guidance for 2004 of approximately $168m to $170m, or a midpoint of $169m. Among other things, this guidance took into account the expected ramp-up of cash flow from three acquisitions included in our 2003 business plan. Specifically, those were the Red River acquisition, the Mesa acquisition, and the El Paso acquisition. In our July conference call, we increased our guidance for this year to $171m to $178m to take into account various fine-tuning adjustments, as well as three additional acquisitions not incorporated into the initial forecast. Specifically, the three additional acquisitions included the Iatan acquisition, the Alto acquisition, and the acquisition of Iraan to Midland Pipeline system. While there's still a lot of moving pieces, our new guidance incorporates additional fine tuning, as well as the recently announced acquisition of the ArkLaTex Pipeline system and the pending acquisition that is currently subject to the letter of intent that Harry mentioned.

Subject to all those caveats, we would currently guide you to an EBITDA range for next year of $180m to $185m. The midpoint of $182.5m is approximately 8 percent above the midpoint of our initial guidance for 2004 and approximately 5 percent above the midpoint of the guidance that we provided in July. I would point out that our guidance includes a preliminary estimate of G&A expenses attributable to the Sarbanes-Oxley requirements with respect to management's testing and assertion as to the adequacy of internal control and the outside auditors' opinion on our assertion. However, we really don't have much in the way of historical guidance to accurately project these core costs, and accordingly, we will probably tweak these estimates as we go forward in the next year.

We anticipate providing more detailed guidance for 2004 in our year-end conference call, which is to be held in the first quarter of next year.

Our updated guidance for the fourth quarter and full year of 2003 and the assumptions associated therewith are set forth in detail in the 8-K that we filed this morning. I would point out that the updated guidance reflects the impact of the September equity offering, which reduced our debt by approximately $100m and increased the total number of units outstanding to 55.5m units. In addition, assuming we continued to meet the tests that would trigger the conversion of the remaining subordinated units to common units, as well as the vesting of approximately 580,000 restricted units under our long-term incentive plan, the Partnership will recognize a compensation charge to the income statement equal to the market value of the units on the vesting dates plus the employer's share of associated employment taxes. Based upon the unit price at September 30 of $30.05 per unit, we estimate this charge and the associated employment taxes of approximately $21m, of which approximately $17m would be accrued at the fourth quarter, and then the balance would be spread over the first two quarters of 2004. A portion of the restricted units will be satisfied with the issuance of new units, while the balance will be satisfied with cash.

In addition, as noted earlier, in connection with the anticipated restructuring of our credit facilities from a secured to an unsecured facility, we also expect to recognize a non-cash loss associated with the early extinguishment of debt, primarily related to the charge-off of capitalized debt issue costs associated with our existing facilities. We estimate that to be approximately $3.3m.

Finally, consistent with past practice, we do not attempt to forecast any potential impact related to FAS 133 as we have no way to control or forecast crude oil prices on the last day of each quarterly period. Accordingly, the guidance I provided for the quarter excludes any potential gains or losses associated with this accounting statement.

And then again for more detail with respect to the assumptions used in our guidance, please reference the 8-K that we filed this morning.

And with that, I'll now turn the call over to Greg.

Thanks, Phil. At this point, we trust we have clearly provided a solid foundation to support the first three of our five takeaway points from today's call, which, just to reiterate, was that our business is performing consistent with our business model and generating favorable results; two, that our acquisitions are successfully -- being successfully and timely integrated and are performing in line with expectations; and, three, that we have an exceptionally strong balance sheet and liquidity position and are well positioned to continue to expand our business.

The fourth point that we want to share with you is that we believe there are a number of attractive midstream assets that will be available to be acquired over the next several years and for which we stand competitively well positioned to acquire. As has been the case for the last several years, we continue to be extremely busy evaluating potential acquisition candidates that we believe complement our current business activities and also provide attractive accretion potential for our unit holders. While we can give you no assurance that the potential sellers will, in fact, divest of the assets or that we will be the successful acquirer of the assets, we do believe there are sufficient candidates available to enable us to achieve, on average, our target of acquiring $200-300m per year in strategically complementary and accretive assets over the next several years.

The fifth and final point is one of -- a little bit of a bigger picture. It relates to our long-term view of the North American crude oil sector and what we believe is our unique and strategic positioning.

Excluding any change in market forces, we believe we are better positioned than any other crude oil midstream entity to capture increased market share in and around our existing assets and to expand our asset base by continuing to consolidate, rationalize, and optimize the North American crude oil infrastructure. We have an experienced and cohesive management team with extensive knowledge of the crude oil industry and a proven track record of successfully integrating acquisitions. We also have what we believe is one of the premier crude oil industry assets in our Cushing terminal, as well as several complementary assets that enhance the value and competitive position of that particular asset. In addition, we have an exceptionally strong balance sheet and credit profile [that] will enable us to capitalize on these opportunities while maintaining this solid credit profile going forward.

On top of all those attributes, we also see a medium- to long-term market dynamics for the crude oil industry, shifting in a manner that we think will play to the strength of our asset base and our business model, and that's a proven model that is designed to deliver stable results in cyclical and volatile markets. I'm going to take just a few minutes to share with you kind of that outlook.

The shift that we foresee is to an increasingly more volatile market that will be subject to more frequent short-term swings and market prices and shifts in market structure. We believe these price swings and shifts in market structure could be much more pronounced than we've seen in the last 20 years or so since crude oil was deregulated and began trading on the NYMEX. Specific factors and conditions that we believe will cause this shift include --

One, the continuing convergence of worldwide supply -- crude oil supply and demand lines. While we believe world crude oil production capacity will continue to exceed world crude oil demand for the next several years, the surplus itself is at its lowest level in the last 20 years. In the United States alone, we now import over 60 percent of our crude oil needs from foreign sources.

The second aspect revolves around inventory. For the last several years, companies have been under pressure to keep crude oil inventory levels low, a situation that we believe has contributed to the increased volatility we've experienced over the last five years. We believe these volatile conditions will be further exacerbated by an anticipated reduction in actual physical storage capacity in the United States between now and 2009. The Department of Transportation has adopted rules that require all storage tanks in the United States that are subject to DOT jurisdiction be brought up to API 653 standards by 2009 or, alternatively, be taken out of service. We believe these rules will impact storage tanks in a manner similar to the effect government-mandated emissions and product specification requirements had on refineries over the past 10-plus years. The result is several will shut down, and a few will expand.

Notably, a significant number of tanks -- storage tanks in the United States are well over 70 years old and were built with outdated technology that we believe will make it economically impractical to bring these tanks up to API 653 standards. As an example, we estimate that nearly 75 percent of the 27 million barrels of capacity in Cushing, Oklahoma alone are in excess of 25 years of age and that nearly 33 percent are in excess of 70 years.

The third and final point on that is that in addition to these other two factors, a battle for the coveted United States market appears to be shaping up as new North American supplies are being brought to market starting as early as late 2004. These supplies will seek to displace current foreign crude imports.

To the North, Canada’s oil sands production is forecasted to increase somewhere between 400-700,000 barrels per day over the next couple of years.

To the South, deepwater Gulf of Mexico production is projected to increase by over 500,000 barrels per day in the next 18 months to two years.

While certainly some of this incremental supply will satisfy incremental demand or replace domestic depletion, overall, we anticipate the increase in North American production will displace at least a half a million barrels per day and perhaps as much as one million barrels per day of crude that is currently being imported from other countries. In addition, these new supplies are also adding a fair number of additional grades and varying qualities of crude into the overall mix. We suspect that these foreign crude suppliers will not give up their market share without a fight. As a result, we expect to see significant crude-on-crude competition, especially in the grades and differentials to market indices.

We believe these macro and micro factors will collide in a somewhat perverse manner to significantly increase the frequency and perhaps even the severity of movements in outright price, inter-month spreads, and basis differentials between grades of crude oil. The overall narrowing of the supply/demand gap and overall reduction in inventories and inventory storage capacity means that really even relatively minor interruptions can cause significant price swings. These interruptions can be geo-political, weather-related, or associated with man-made or natural catastrophes. They can even be derived from unexpected declines in production, delays in production coming on stream, or even acceleration of production on stream just because the supply/demand lines are so tight. At the same time, on a micro scale, the inefficiencies created by the number of grades and increased North American volumes will create significant opportunities for a company like ours that has a business model and assets that benefit from such conditions.

Let me clarify that we do not believe we are immune from some of the negative consequences of these conditions, but on balance, we believe we will gain much more than we will lose. For example, while certain of our crude oil storage tanks will require upgrades to meet API 653 specifications, we believe these represent a much smaller percentage of our total tankage than most of our competitors. Specifically, in Cushing, our average tank life is approximately five years, and our terminal is the most advanced facility of meaningful size built in the United States in the last 25 years. As a result, we own approximately 85 percent of all tanks less than 25 years old at the Cushing Interchange. Moreover, our Cushing manifold system is specifically designed to be expanded to more than double its current capacity, and we have a fairly strategic land position that we believe provides us a competitive advantage with respect to expansion opportunities.

It is for these reasons that we are optimistic about the Partnership’s future performance beyond the current guidance periods and our ability to maintain solid -- solidly maintain and grow partnership distributions. It is also for these reasons that we are absolutely committed to maintain an extremely strong balance sheet.

Let me close by stating that we are well on our way to achieving all of the goals we established for 2003, and we are enthusiastic about our prospects for 2004, and, as you can tell from the prior discussion, well beyond.

That wraps up the items on the agenda and we’d like to thank you all for your participation in today’s call. For those that joined us late, a complete written transcript of the prepared comments of the call will be posted on our website at www.paalp.com very shortly after this call, and, Laura, at this [inaudible] point in time, we would open the call up for questions.

Thank you. The floor is now open for questions. [Caller instructions.]

Our first question is coming from David Fleischer of Goldman Sachs. Please state your question.

Hi. You hit a lot of items here. I guess one item I'd like to ask first about is, you know, the oil markets, as you point out, have remained backwardated, although perhaps not as steeply backwardated as earlier in the year, and I'm trying to think about the slope issue and how that impacts profitability. I'd love to hear your thoughts on how profitably you're able to operate in this type market, you know. With the curve we see today, should it be sustained? And try to help us understand and compare it specifically to a more steeply backwardated market and, clearly, you know, we know less good than -- it's less -- this is a better market than the contango market, but if you could help us understand some of these variables and your ability to benefit in this market and if it's less good than earlier in the year or not?

Yeah, David, this is Harry Pefanis. The market right now is in a slightly backwardated scenario. The last few months, [it'll] start off in backwardation and ended up in slight contango, not really contango enough to take full advantage of our tankage. But still in an area where we're profitable and able to generate, you know, good results with our assets, you know, we employed a number of different strategies, trying to anticipate what we think the markets -- what opportunities the market will provide us using both our tankage and our leased crude, and, you know, the volatility helps. Even if it's going down, it goes back up. If it stays in a, you know, position like this and just stays flat throughout the next year, you know, probably a little negative to us overall but not tremendous.

How would you compare this type of slight backwardated -- slightly backwardated market and its impact on you versus a contango market, where you'd be getting the fees, you know? Is it not too much different, or is it still slightly advantageous to you?

David, probably this market I would probably characterize as a bit of a sideways market, you know, not a lot of pronounced backwardation and yet not a lot of deep contango, as you mentioned, to take advantage of some of the storage opportunities. So I would say this is the worst -- the poorer market conditions. The only times that you can probably look back and see something that's meaningfully worse was probably at the end of '01, first part of '02, where we basically just had almost a flat curve in the market structure. But, you know, for relative to the first nine months of the year, as Harry mentioned, it's certainly weaker. It's actually weaker than what we're projecting for next year. You know, my personal belief is that this is probably the lull before the storm simply because the market's going to take a direction either as the economy recovers or as it doesn't. As some of this production comes on these battles, if you will, for the North American market, which you're going to fight both in the grades and basis differentials against foreign crudes, probably just going to add a lot of volatility. You know, we may -- once the market goes into contango, we make about the same amount of money there as we do in a normally backwardated market. When it goes from contango to backwardations, we tend to do very well, and the only times we really get hurt are when it's kind of in that sideways market, which is what we're experiencing for probably the latter two-thirds, Harry, is what we're projecting of the fourth quarter?

Probably the entire fourth quarter we're expecting a soft market from our perspective, slight backwardation.

Okay.

Our next question is coming from [David Balluck][ph] of [Sandal][ph] Asset Management. Please pose your question.

Good morning. I was wondering if you would comment on the recent emergence from bankruptcy of Link and what, if any, competitive pressure that may pose?

Well, you know, certainly if we wanted to pay them accommodation, they got in and got out of bankruptcy in roughly, I think, four to five months, and so that was very quick. And they came out, I think with, you know, articulating a vision of trying to return to the competitive landscape. So we welcome them to that arena. There are certainly some challenges that anybody faces in this business, and, you know, they'll be just like any other competitor that we have out there. We certainly believe the superior balance sheet that we have and the assets that we have in Cushing probably, you know -- quite frankly, we think, we've got a better vehicle. So there's not much more I can say beyond that.

This is Harry Pefanis. I mean I think if you can look at it in reverse, when they went into bankruptcy, we were not a huge beneficiary of increased volumes because of that, and when they come out, we don't expect, you know, a tremendous amount of pressure. I mean I think if you can look at where their assets are located and where our assets are located, while there is a little bit of overlap, there's not a tremendous amount of overlap in the assets.

Okay, thank you.

Our next question is coming from [Steven Erico][ph] of [Ludcoast Wood Capital][ph]. Please go ahead with your question.

Thank you. I have a couple questions. Being new to the story, guys, I was just looking at your EBITDA, and I was wondering how you guys view your distribution coverage.

And in light of that, I’m wondering what type -- how you're factoring in these LTIP issues. Do you look at them as king of a one-time effect or, you know, is it making you perhaps a little bit more cautious with your distribution policy?

Steven, certainly there's a one-time effect associated with these particular group of vestings. You know, there's a large number of them that were, in effect, pent-up, if you will. Many of them were granted or promised to employees back when we went public, and the critical event in that vesting traunch was the conversion of subordinated units into common units, and that's back when the distribution was at a buck 80, was what we [held] the MQD. So, you know, I'd probably say 80 to 90 percent of the amounts that are going to vest here are related to, you know, historical issues that for accounting phenomena -- and that is to say we couldn't assess the probability until an event beyond our control associated with the conversion of subordinated units, you know -- got to that curve and then let us get to a probability assessment. Going forward, clearly, as we make either additional grants or we have certainly grants outstanding right now that are tied to distribution performance levels, and we would expect future grants to be tied to distribution performance levels, the next [traunch] if you will of vesting that occurs outside of this kind of one-time event is when the distribution gets to 230 and then to 250 and then I think the next one will be at 270. So to some extent, we'll view that in context with those lock-step increases. Clearly, they can't vest if we don't raise the distribution, and we can't raise the distribution unless we can cover not only the number of units that are outstanding but those that would be outstanding underneath that vesting scenario.

Okay. And, second question, have you disclosed the one acquisition you've closed and the other one you're negotiating what multiple of distributable cash flow or perhaps EBITDA these assets are being acquired at?

Steven, we haven't, although in general throughout all of 2003, as we've talked about these smaller -- I say smaller -- you know, acquisitions that aren't significant in magnitude, in the couple hundred million range, pretty much we've been looking at multiples in the 6.5 to 7 range. You know, some of them are a little bit lower if they're a bolt-on to an existing acquisition, so, yeah, I would tell you if you want to give a wide swap to it, it would be 6.5 to 7.5. If you wanted to narrow it up, you'll be in the 6.5 to 7 range.

And that's EBITDA or distribute -- or what you would call -- or what I would call free cash flow?

It's EBITDA with normal distributable cash flow. That is to say a couple percent, you know, of EBITDA might go to maintenance capex. Whoever gets significant maintenance capex would disclose it differently, but just because people publish EBITDA numbers and not DCF numbers, of the assets sold or acquired, we tend to use that as the EBITDA multiple. But so it is an EBITDA multiple, and there's not a material amount of maintenance capex associated with it.

And then my last question, you mentioned the Point Arguello field, Rocky Point, that PXP got approval on. You don't expect much impact in '04, but could you just give me some idea of the potential impact that could have in '05 if you started with a base of 50 -- I think you said 55,000 barrels a day in '04 is what you're projecting?

Yeah, of the 55,000 barrels a day, I think we're projecting about 10.8 or 10.8 thousand barrels a day -- call it 11,000 barrels a day to come from the Point Arguello platform complex.

You know, order of magnitude in 2005 and beyond, based upon some of the information that has been shared on PXP's conference call and then -- which they didn't give so much specific volume guidance is pretty much saying, I think, they could probably translate it was, worst case, they would hope to hold volumes flat, and best case is it's going to go up from there. There is information out on some of the public websites for the California Commission -- Coastal Commission, you know, that uses numbers that are over 20,000 barrels a day. And so, you know, put that halfway in between the 11 and somewhere over 20, and it's a pretty meaningful number. I think for every 5,000 barrels a day of change based upon the current tear structure, it's somewhere around $3-3.5m a year of incremental cash flow. So it certainly can have an impact, and it's just -- you know, we hate to get over the tips of our skis here before we go into '04. I think what we would hope is the drilling that does take place in '04 will offset the normal decline that we would've, you know, pretty much expected out of that, and then from that particular field, which is only, you know, 20 percent of the total OCS.

Okay. Thank you very much.

Thank you.

Our next question is coming from [Yves Siegel][ph] of Wachovia Securities. Please pose your question.

Good morning. Do you have an estimate of what the cost would be if you raised the distribution -- if you got the distribution level of 230 sometime in '04? Do you have a handle on that yet?

What the cost would be? You talking about with the LTIPS?

Yes.

We do. Actually, Yves, it's in our 8-K is the number of units.

[Inaudible].

Yes, an additional 87,000 units. So if you put a $30 number on it, it's about 2.5 million.

Okay, no cash, just units?

You know, part of it will be cash simply because of the -- the dollar amount will be -- that we will owe to the individuals will be either in cash or units, that amount, $30 or $31 times the number of units, call it 87,000. We will also owe, dependent on whether it's early in the year or late in the year, the employers' share of payroll taxes. If somebody's beyond their limit, then we owe 1.45 percent. If it's below their limit, then we'll owe as much as 7 percent on top of that. So, you know, if you wanted to use kind of an average number, you'd probably put 5 percent on that for the cash portion.

For some of the lower-level employees, Yves, we offer them the ability to take cash instead of units. For the officers, such as Harry, myself, and Phil, you know, we want the units and take the units.

Great. Do you also have a sense -- and I know it's early -- in terms of what maintenance capex may look like in '04 and what growth capex may look like?

We do. We've got -- in the maintenance capex, which I think is disclosed in our 8-K, I think we're giving guidance of roughly around $8.5-9m. And I would -- my only caveat to all this is we caution everybody that this is preliminary. We just know everybody always wants to know what the cake looks like before it's baked. We'll be coming out with definitive guidance, which will lay out all of our capital programs and specific details, you know, in our February conference call, but right now, we're looking at somewhere around 8.5 to 9. Not a material move. You know, we thought we'd spend about 8.5 this year. As it turns out, we haven't had to spend [inaudible] until maintenance capex is going to be closer to, you know, $7m, so about, you know, $1.5m lower what we'd forecast. When we did our estimate for next year, we took roughly our eight -- eight-and-a-half million that we thought for this year, assumed that we would spend it next year, and we added about a half a million on for some of these acquisitions that we've made. So I think it ought to be safe, you know, plus or minus a million, and more likely -- hopefully, it's, you know, minus a million.

And, Greg, when would you -- well, in terms of growth capex, is that program going to be done by the fourth quarter? So do you have anything built in yet for next year?

We do, inherent in some of our numbers. We've got this acquisition that we're looking to do, Yves. There's a couple of projects that we intend to lever off of. Not so much bolt-on acquisitions, but some things that we want to do to meld our assets into theirs -- the acquired acquisition. And then we've got a couple things that we're working on right now. So it's pretty early to really outline in total what amount it is. I think aggregate amount in total, including those deals, which might be order of magnitude, it's 40 to 30? You can speak up. They won't bite you.

[Inaudible.]

Right around 30 right now. If that number moves, it will be because we're moving EBITDA with some plans in there. But we've got some projects that we're trying to put the fine-tune on as to how much we can actually expect to get out of them next year if we spend the capital because obviously if you don't spend the capital until June, you're not going to get a full-year run rate out of the EBITDA until the latter half of the year.

Is it fair to assume that those -- growth capex gets a better return than the acquisitions?

Yes, sir.

And then just moving forward, when do you have to start worrying about the storage tanks? I think you said 2009 is sort of the deadline. So when do we have to start thinking about that?

Well, you know, we're thinking about it right now. We already spent last year a couple million -- million dollars. We'll spend about that much or a little bit more, and it's embedded in this kind of guidance we're giving you for '04, so we're actually -- in our game plan, we're taking care of the problem as we go along. Again, we've got proportionately a lot less of a problem than we think some of our competitors do, and just to give you an example, order of magnitude, you know, if you go in to a 60-, 70-, 80-year-old tank, you know, you're going to spend probably a buck to a buck-and-a-half per shell barrel of capacity just to test it to see what you need to do. And if you take some of the examples that we know, we think we can extrapolate from, then to go in and fix, you know, a 70-year-old tank, to bring it up, and be able to demonstrate to the DOT that you're in compliance is going to cost you somewhere between an incremental four to, you know, perhaps as much as six dollars. And, you know, if you use the middle part of that, I mean after you get done, you've spent six-and-a-half dollars, and you still have a 70-year-old tank. So we think many of our competitors actually, you know, will come to the conclusion that they're better off just to tear some of them down or take them out of service. We certainly have some that as a result of our acquisitions that are aged as well. Not all of them are exactly -- look like what we've got in Cushing. But overall, what we'll be making a decision on, is it better to, you know, repair a tank that's in West Texas if we can get the same economic function out of it by simply building a new tank in Cushing and get the added incremental economic benefit of having ability to use it for storage services and other things that we can't currently use the tank for in West Texas.

So, you know, the numbers that we give you in the guidance will actually include us taking care of that problem. I think we even made an estimate at one point in time in our 10-K that we thought the total aggregate cost was going to be in the $5-10m over a five-year period. So it's not a whole lot for us. But, again, a lot of that is because we've got new tanks in Cushing and because as we've acquired these assets, we've made sure that we built part of that cost into our acquisition program so that when we get them, we bring them up to standard.

And I just have the last two questions. Greg, in terms of acquisitions, are we likely to continue to see these relatively small- to mid-size acquisitions, or do you think there's some sizable acquisitions that may come up in 2004?

And then, second, sort of just following on to an earlier question, in terms of the competitive landscape out there, are you seeing more competition for acquisitions? That's part A.

And part B, in terms of just organic growth of -- organic pipeline expansion projects from competitors, are you sensing a change in landscape there? Particularly, you know, I’m thinking of a project to Cushing from a competitor of yours and how you might view their landscape going forward. And thanks for the answers.

If we play 20 questions, I bet I don't need more than one to guess that latter one.

No, the project that you mentioned -- let me address the organic first. We see nothing on the horizon relative to organic project pipeline construction or conversion of pipeline that does anything but probably help our business. We would love to see [Embridge][ph] be successful in bringing, you know, 300,000 barrels a day or even half that much volume into Cushing because once you get that many barrels incremental coming from that direction, guess what they've got to do? You've got to [terminal] that crude oil, and now you're back in to a third of the tanks there are over 70 years of age. We've got the ability to expand, and so we think there's quite honestly a potential for a partnership there to develop amongst either us and the refiners that are shipping or the producers that are shipping, or, you know, the pipeline company itself. So, really, from that standpoint, we really haven't seen anything that has caused us any concern about the long-term landscape.

As far as acquisitions, I think it's fair to say, yes, we have seen an increase in competition, primarily from, I'd say, either financial-oriented players or industry players that are now backed more seriously by financial players. What that means so far is you talked about size, and I'll kind of meld that answer into it as far as acquisitions. We found that we are so far more competitive on the smaller transactions because we have pure operating synergies. We're business builders. We've got a strategy. I don't think there's an asset that we've either bought or made a bid on in the last four or five years that we didn't really -- haven't been analyzing for several years before that, and that's still true today for what we're chasing. We have chased some bigger transactions, and I guess one example, as the competition increased, we haven't been the winners on that because the larger transactions tend to attract the financial players, and they're not either playing with the same set of economics we are, or they may -- you know, be ignorance is bliss. Some of the problems that they may be taking on and that they've paid for in the purchase price, they may not realize they're going to have to address some of these. We found out we're better off to be patient, and if we're right about the way we analyzed the asset, it will be coming back to us because somebody can't make the returns on the capital that they paid for.

But, you know, so we are looking at bigger acquisitions. We bid on several that are well above 100, 200 million, and some even larger than that. We just haven't been successful yet at bringing those to the house. The smaller acquisitions, you know, economically, I'd rather do ten $20m acquisitions than one 200. Now, our acquisition guys cringe because it takes as much blood, sweat, and tears to close a $10m acquisition as it does a $200m, and so there's some balance in there.

I'd say the other thing that we're very proud of this year and have learned the hard way is that we have the ability and the demonstrated track record of integrating these acquisitions not only so the back office functions well but that we extra the synergies in the field. So, you know, to the extent we've got competitors who don't have that history and they have to learn the hard way, that usually speaks for opportunity for somebody that's on their toes.

Thanks again.

Thank you.

Our next question is coming from [Gil Alexander][ph] of [Barfield Capital][ph] -- excuse me, [Barfield Associates][ph].

Good morning. Could you give us a feel of on your plans for 2004 how much equity you might want to bring to public?

I would say we're pretty happy with our balance sheet right now. To the extent that we had any reason to raise equity, it would probably be in connection with either a large acquisition[s] or a series of smaller acquisitions that, in the aggregate, probably brought us in the 50 to 100m range. Clearly, part of our annual business plan is to try and make, on average, over a three-year period -- and we budget this -- we put this range out there each year, which is 200 to 300 million. So if we were successful in making $250m of acquisitions next year, you'd expect us to be in the market for roughly 125 million. But right now, we have the strongest balance sheet I think we've ever had, and relative to our peers in the MLP land, you know, we've probably got one of the top two or three out of 20 in terms of balance sheet strength. So there's no other compelling reason for us to go to market for -- to raise equity except in connection with acquisitions, which will only be done if they're accretive, which has been a happy problem, you know, happy circumstance for current MLP holders and an attractive opportunity for future MLP holders.

I thank you.

Thank you.

Our next question is coming from [Ross Payne][ph] of Wachovia Securities.

Hey, guys. Two quick questions. First of all, any thought on when the rating agencies will take a look at the ratings given the change in your bank facility going unsecured?

Well, that's a loaded question, Ross. We hope soon. We certainly have been in communication with them. I will tell you that I think, you know, the consistency of our story and our performance and our -- the way we've adhered to our target credit profile and, in fact, been more conservative year in and year out on that is going to bear fruit here hopefully before too long. The scale issue is certainly there, and the diversification that we've got of the risks that are inherent in our business, both geographically and then functionally, I think, we're -- you know, the credit quality we thought was strong last year, and we would argue, you know, should've been upgraded then. Today I'd say, you know, we're even more adamant that it's -- and we think it's illustrated, and so it's just -- you know, we've got to be patient, but we're going to be aggressively patient, and we're trying to make sure they understand all the nuances and that we address any concerns they have about our business. So pray for us.

Okay, I'll do that. Also, on the California tariff, the 6-percent increase, is that just a typical thing that was put in -- you know, help us with the substantial increase in that tariff.

This is Harry Pefanis, Ross. It's a contractual tariff index, and it's comprised of various components that are really sort of localized to California -- power costs, labor costs, construction costs in California -- and they're all off of public indexes and so right now it goes through October of 2003, but October to October, and we adjust the rates in -- January 1. So it's not the same CPI index that all the other pipelines are subject to. And the other component is that the index -- if the index goes down, the tariffs don't go down. So what happened last year is the index actually went down. The tariff stayed the same. So this year's index exceeded last year's decline and [indiscernible] 6 percent.

Yeah, maybe to say it a different way, if in a given year the index says it should go up 5 percent, it would go up five. If the next year it said it would go down two, it wouldn't go down, but if the next year it said it should go up five based on that year, we'd actually go up a net three. So it's -- it can go up but not down, and this year, the actual calculated increase based upon kind of the California CPI -- now that's not an official index but kind of what Harry was talking about -- said it should go up, I think, closer to, you know, the low teens, and it netted down to six because last year there would've been a decrease in the absence of the floor that we have on it. So it's just simply a function of costs are going up in California based upon the index, and so we get that ratchet up in our rate.

Okay. And that index is based on cost of -- you know, is it cost of energy and a million other things? Or what is it in California that would make it, you know, a double-digit increase potentially?

Energy, power -- energy, labor costs, construction costs.

Okay.

Natural gas costs.

Okay. Very good. That's all I've got. Thanks.

Thanks, Ross.

[Caller instructions.]

Our next question is a follow-up question coming from [Steven Erico][ph] of [Ludcoast Wood Capital][ph].

Hi, guys. Sorry, a couple more questions came to mind. Number one, as far as your debt is concerned, what percentage of it is fixed at a long-term rate, and what would you say is the average maturity?

We have about 60 percent of it is fixed right now, and that's a combination of fixed-rate debt -- senior unsecured notes of $200m, and then we have $100m of interest rate hedges. And after the -- when the facilities are done, in about probably seven years, something like that? --

The $200m, Steven, has -- the bonds are due in 2012.

Okay.

And then the 300 right now is under a combination of [traunch] B debt, as well as under our bank facility. And I think right now it probably has a remaining half-life somewhere in the two-and-a-half to three years. As Phil said, we're going to be extending that facility, and that will push it out to, you know, around four because it's basically all revolver and no term with any -- without any maturities. And then, of course, we'll be monitoring the bond markets once we believe our ratings are reflective of the true credit quality and there's opportunities to add on to that.

Because I would expect with rates as low as they are you -- you know, it's probably an opportune time to -- [indiscernible] to be a lot of other MLTs because a lot of their gains have been on, you know, playing the interest rate market, and I would hope that we would try to take advantage of these lower rates and lock them in for a long period of time.

Right. I’m trying to coordinate everything. Honestly, by just simply -- the new bank facility will move us from a secured facility to an unsecured, so assuming that we understand the way the rating agency methodology is, is that our bonds that are currently trading, which are notched off of our BBB-minus credit rating, S&P, to a BB-plus, that notching will be removed, so I'll put them as a true BBB-minus credit, and then at S&P, we're a BA1, and they've notched the outstanding unsecured debt to a BA2. So once we get [inaudible] in place, we ought to be able to gain, you know, a full upgrade on both of those out -- from both agencies on just the outstanding debt. Clearly, we're hoping for and praying for an increase in the overall corporate rating, but you're talking about something that could be, you know, order of magnitude, anywhere from certainly 25 to as much as 75 to 100 basis points' differential by getting the ratings right on that debt before we go to market.

Makes sense. One other question if you can help me. If I take your EBITDA guidance next year, at mid-point of 182 million, subtract out 32 million of interest expense and 9 million of maintenance capex, does that work down to, you know, what one could look at, to what your distributable cash flow could be? Or are there some other items I should be putting in there? Because I come up with 141, and you guys are currently at 55 cents per quarter, you know, on 55 million shares. Works out to about 120 million.

Yeah, actually, if you take -- include the GP [indiscernible], the distribution requirement to satisfy the 220 on the roughly 55 million of units, 55.5, is about 130 million.

Okay.

Okay, so that would give you, under your scenario, a coverage ratio, you know, of about 108 or 109, I guess. The challenge that we'll have is as we start to lock in interest rates, what does that do to the projected interest cost for next year?

Okay.

Right? Because if you substitute fixed-rate debt for floating-rate debt, and floating-rate debt's, you know, based on all-time-low LIBORs, you're going to get an increase. Now, our challenge is management, and we think we're certainly up to it, is to milk more EBITDA out of our current assets, and that's why we're in the planning process right now. And so, you know, hope when we come back we can tweak a little bit some of the projects we've got for next year, you know, to generate a little bit more EBITDA as well.

And that guidance you gave next year of 182 million, does that include the 200 million of annual acquisitions you guys forecast each year, or is that -- if you didn't make another acquisition, you guys would feel comfortable with 182 next year?

It's the latter. It does not include any future acquisitions other than the ones we've talked about here on the call today that we've tried to close.

Okay. Thank you very much, guys.

Thank you.

[Caller instructions.]

Our next question is coming from [Brian Watson][ph] of RBC Capital Markets.

Hey, this might be a bit of a repeat, but I want to make sure I was understanding the conversion of the restricted units. I guess it was a million in total, and you've got this charge this quarter represented 250 -- or about 250,000 of those. When potentially do the rest convert? [Inaudible] meet all of your benchmarks?

Certainly, when the subordinated units -- if the subordinated units, the remaining 75 percent, Brian, convert at the end of this year -- and we'll have to look at December 31, say, "Did they convert," and then assess probability for the LTIPs vesting -- but let's assume that that's what, in fact, does occur. Of the total million, 250,000, we've assessed probability on and reflected the charge in the third quarter, of the total million, about 800-and-some thousand are tied primarily to the conversion of the subordinated units, so that will leave about 580 -- 560-580,000 units that would then be converted to a P&L accrual charge at the end of the fourth quarter even though they don't -- won't actually vest until sometime in the middle of next year.

The balance -- and you add those two numbers together, and I think you come up with around 835,000 or 840,000 units. The remaining 160,000 are tied to distribution thresholds, such as a 230, 250, and so on, so they're going to vest sometime in the future when we either hit that level of distribution, or as management can foresee that we will, so that the probability assessment says it's more likely than not that they'll be vested -- or 75-percent probability they'll be vested, and then we'll take the charge or an accrual in that period even though the actual outflow of the units are cash, depending on how we pay them. Won't happen for some period in the future.

Okay, and the expense is regardless of whether you pay them in cash or you issue units, you've got the expense that [inaudible]?

That's correct.

Okay, thank you.

Thank you.

Gentlemen, there appear to be no further questions at this time.

Okay. I want to thank everybody for participating in the call. We apologize for the length of it, but we did think it was worthwhile to give you some of our thoughts and visions on the future, not only within the current projection period of '04 but far beyond that as we continue to build our business, and so we appreciate your tolerance for participating in the call. Thank you.

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