Plains All American Pipeline LP (PAA) 2003 Q4 法說會逐字稿

Welcome to Plains All American Pipeline's fourth quarter and full year 2003 results 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, 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 to you the risks and warnings set forth in Plains All American Pipeline's most recently filed 10-K, 10-Q, and 8-Ks, and other filings with the Securities and Exchange Commission.

In addition, the partnership encourages you to visit Plains All American's website at www.paalp.com; in particular, the section entitled non-GAAP reconciliation. This section presents a reconciliation of certain non-GAAP financial measures that may be used here today in the prepared remarks, or in the Q&A session, to the most directly comparable GAAP financial measures. This section also includes a table of items that impact comparability with respect to the partnership's reported financial information.

Today's conference call will be chaired by Greg L. Armstrong, Chairman and CEO of Plains All American Pipeline. Also participating in the call are Harry Pefanis, Plains All American President and COO; and Phil Kramer, Plains All American EVP and Chief Financial Officer. I will now turn the call over to Mr. Greg Armstrong.

Thank you, Danny. Welcome to everyone.

This morning, we announced fourth quarter operating results that came in solidly in the upper half of the guidance range we provided on October 28, 2003. We reported fourth quarter EBITDA of $45.7 million, excluding charges for equity-related compensation accruals and a loss related to our debt refinancing, which, when adjusted for the $2.1 million, non-cash mark-to-market gain due to the impact of SFAS 133, equates to EBITDA of $43.6 million. This compares favorably to our guidance range for the quarter of $41 million to $45 million, and represents an increase of 17 % over fourth quarter 2002 EBITDA, excluding items impacting comparability.

We reported fourth quarter net income, excluding the charges of $24.3 million, which, when adjusted for the SFAS 133 gain, equates to $22.2 million or 36 cents per diluted limited partner unit. This also compares favorably to our guidance range of the quarter of $20.6 million to $25 million of net income and represents an increase of 26% over the fourth quarter of 2002.

With the exception of two items, our actual results for the fourth quarter of 2003 came in very close to the fourth quarter of 2003 guidance we provided last October, as both volumes and margins were right on top or slightly ahead of our forecast. Two items that varied from from the guidance was the LTIP charge, which was higher by $3.6 million dollars, and interest expense, which was higher by $700,000. The increase in the LTIP charge is primarily a function of the fact that our unite price increased about $3 per unit, subsequent to our October conference call, and the increase in interest expense is a function of higher interest costs for December, associated with the refinancing of low cost bank debt, with very attractively priced, but nonetheless, higher cost, long-term, fixed rate debt.

Given that our fourth quarter performance was consistent with prior guidance, and the equity compensation and debt refinancing charges were discussed and entailed in our last conference call and our previous guidance 8-Km we will limit our comments to operating and market factors that affected fundamental performance during the quarter or are expected to have an impact on our future guidance. If we do miss something that needs additional discussion, we will be happy to respond to any specific questions you have in the Q&A session.

At the beginning of 2003, we shared with you management's four specific goals for the year. These goals were to, one, deliver operating and financial performance in line with our 2003 guidance; two, to preserve and enhance the strength of our balance sheet and our credit profile; three, which was to increase our distribution to unit holders by 2% to 4%, excluding the impact of significant acquisitions; and four was to make on average $200 million to $300 million of accretive and strategic acquisitions per year of core subject to the availability of attractive opportunities.

By almost any measure, 2003 was a very productive, as well as a rewarding year for Plains All American and stake holders. We not only were able to meet or exceed each of the goals that we set out at the beginning of the year, but we did it while absorbing unforeseen costs and time requirements associated with various corporate governance initiatives, Homeland Security mandates and our challenges. In addition we made it through another year of executing our pipeline integrity management and API 653 programs without adverse developments.

I want to take a few minutes to highlight what I believe to be ten of the more notable accomplishments achieved by the partnership in 2003. The first, that our operating results exceeded the operating and financial guidance that we provided at the beginning of the year, even excluding contributions from acquisitions not included in our original guidance. Our reported results for 2003 included the impact of certain items that impacted comparability between periods, the majority of which were identified at the beginning of the year, but were not quantifiable in advance, excluding those items impacting comparability EBITDA for 2003 was up 33% over 2002.

The second item is that we completed a total of ten accretive and strategic acquisitions per aggregate consideration of approximately $160 million. Many of these transactions were of the bolt-on variety and complemented our existing operations in their respective areas. I would point out that seven of the ten were were not incorporated into our initial 2003 guidance. In December 2003, we also announced a definitive agreement to acquire (inaudible) owning interest in the Capline pipeline system and related systems from Shell for $158 million. We do expect this transaction to close in March.

The third item is that we successfully syndicated a new $950 million credit facility, that significantly reduced our incremental borrowing costs by reducing our LIBOR-based credit spread by over 100 basis points. The fourth quarter item is that we strengthened the partnership's overall capital structure, maintained excellent liquidity, and entered 2004 at a very favorable position relative to each of the metrics in our targeted credit profile, and that's despite a year of acquisition and capital expansion activities.

The fifth item is that we obtained an investment grade rating of BBB- from Standard & Poor's, and we were placed on review for a possible upgrade to investment grade status by Moody's. Also, as a result of refinancing our secured credit facilities, both agencies removed the notching between our senior unsecured and senior implied credit ratings, thereby resulting in an upgrade of our 7 3/4 %senior notes.

The sixth item was that we accessed the debt capital markets by issuing $250 million of ten-year senior notes at an effective yield of roughly 5.7% and a credit spread of 125 basis points over Treasuries. That represents an improvement in credit spread of up to 170 basis points over the inaugural debt offering, which we completed 14 months previous. As a result, we extended the average life of our long term debt to approximately nine years. We have no final debt maturities until 2007, and we've locked in attractive interest rates on a substantial portion of our debt.

The seventh item is that we did satisfy the final requirements for the multi-year subordination test under our partnership agreement, which resulted in the conversion of our subordinated units into our common units, which adds simplicity and flexibility to our capital structure. The eighth item is that we increased the annual distribution to unit holders by 4.7%, going from $2.15 per unit on an annualized basis for the February, 2003 distribution, to $2.25 per unit on an annualized basis for the February 2004 distribution.

Overall, for item number nine, we generated a total annual return to our unit holders for 2003 of approximately 44%. And then, finally, and very importantly, the partnership ended the year positioned to continue its multi-year track record of improving its operating and financial results and growing its distribution to unit holders. All in all, the partnership achieved each of its stated goals for 2003, and much more. As a result, it was a very rewarding year for all of PA's stake holders. Looking forward, 2004 is also shaping up to be an active and productive year for the partnership.

The remainder of today's call will be broken down into three parts. First, Harry will provide an operations view and set the stage for many of our 2004 activities. Next, Bill will provide an update on our capitalization and liquidity, discuss our recent capital markets activities, and review our financial and operating guidance for the coming year as well as more specific guidance for the first quarter of 2004. And lastly, I will wrap up by sharing with you our goals for 2004 and making a few closing comments.

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 remarks for this call will be posted on our web site at www.paalp.com shortly after the completion of this call. With that, I will now turn the call over to Harry.

Thanks, Greg. During my part of the call, I'm going to provide a brief overview of the performance drivers and the market conditions that affected the fourth quarter performance. I'm also going to update you on our acquisition integration activities and our recently announced acquisitions, as well as provide a status report on significant projects in our capital program. As I touch on each of these subjects, I'll also highlight certain of the critical operating assumptions that have been incorporated into the operating and financial guidance Bill will provide later in the call.

Let me start off by making a few comments on our fourth quarter performance. Excluding the charges Greg refer to earlier, on a comparative quarter basis, our EBITDA increased by 17%. Notable contributions to the growth of both of our business segments included acquisitions completed in 2003, the contribution of -- from our Phase III expansion in Cushing, and that was completed in January of 2003, and execution of our post acquisition exploitation plans. Part of the growth was muted by cleanup costs associated with a pipeline spill caused by an act of nature, and the impact on the fourth quarter market conditions of the blackout that occurred in the U.S. and Canada in the third quarter of 2003.

Overall, our pipeline transportation buys for the quarter were generally in line with our fourth quarter guidance. Our two largest revenue generating systems are the all American Pipeline system in California and our Basin pipeline system in west Texas. The All American pipeline system averaged 57,600 barrels a day, which was slightly below our guidance for the quarter.

Core volumes (phonetic) on our share of the Basin pipeline system averaged approximately 262,000 barrels a day. That was about 12,000 barrels a day above the guidance for the quarter. In the aggregate, volumes on our other pipeline systems were generally in line with the guidance for the quarter. And our gathering marketing terminalling and storage segment, the aggregate volume, segment margin nd segment profit were generally in line with our expectations for the quarter.

While the crude oil market was characterized by high absolute prices in the fourth quarter, the average backwardation for the quarter was in line with a normal crude oil market. The guidance for 2004 that Phil will cover in this call is also based on what we consider to be a normally backwardated market that is in line with the -- excuse me in line with the fourth quarter of 2003, but not as strong as the first eight months of 2003. And let me point out that there will be ups and downs throughout the year, some of the market currently being sort of the March, April time frame, and the market is -- has been stronger than normal. First couple months of this year were pretty normal. When I say this year, I mean 2004.

In our third quarter conference call, we alerted you that we expected to be negatively impacted by two operating items in the fourth quarter; the indirect and somewhat delayed effects of the August 2003 blackout, and the cost to clean up a spill in Mississippi, a pipeline spill, that is. At that time, we expected the combined impact of these two items to be approximately $2 million in the quarter, and we included that impact in our guidance. It is hard to be precise from calculating the impacts on market, but we estimate that the actual impact of those two events during the fourth quarter was approximately $1.5 million to $2 million.

What I would like to do next is to provide you with an overview of our acquisition activities, as well as a status report on our integration activities. Since our last conference call, we announced or completed four additional acquisitions.

First, in November of 2003, we announced the acquisition of the Saskatchewan pipeline system in Canada. That's a pipeline system that consists of 158 miles of 16-inch main line, and 203 miles of gathering lines that moves crude in through the China area. In 2002, the system transported approximately 52,000 barrels of crude oil per day and at Regina, this system can deliver crude oil into the Enbridge pipeline system as well as into local markets. Now, through the Enbridge connection, crude can be delivered in our Wascana line system. This is an outfit that fits very well with the existing assets in the area. The total purchase price of the transaction was approximately $48 million.

In the U.S., our acquisition activities have been primarily focused on the Gulf Coast region, which is one of the areas we believe has meaningful future growth potential for the partnership. In December of 2003, we announced that we signed a definitive agreement to acquire all Shell pipeline companies interest in entities that own an approximate 22% interest in the Capline pipeline system and an approximate 76% interest in the Capwood pipeline system, for a total of $158 million. We anticipate closing the transaction on March 1.

Since we went through this acquisition in great detail on our December 16 call, I don't plan on repeating that discussion this morning. However, to provide context of the guidance Bill will cover later in the call I will make a few comments on the expected contribution from this acquisition in 2004. Our acquisition model anticipated volumes on the Capline system would average between 110,000 barrels a day and 125,000 barrels a day. The space we own on Capline has historically been the swing provider of capacity. Accordingly, we expect that there will be periods when actual performance will be outside of these boundaries.

For 2004, our guidance assumes an average of approximately 117,500 barrels a day, or approximately 39,000 barrels a day for the first quarter after giving effect to a March 1 effective date. As we mentioned on our acquisition conference call, achievement of the targeted average throughput level should equate to cash flow from operating activities of approximately $19 million. In addition to being a great stand-alone asset, we expect Capline will serve as the primary platform for PAA's future growth and consolidation of Gulf Coast crude oil infrastructure assets. Much the same way we have in west Texas and Canada, we have already begun to build on our existing operations, while making bolt-on acquisitions, or a bolt on acquisition of a complementary asset in the same area.

In December of 2003, we acquired the remaining interest of the Atchafalaya LLC in two transactions for a total of $4.4 million. The convictions were from Shell Pipeline Company LP, and from Gulf Coast Field Services LLC. These transactions increase our ownership in the underlying assets to 100% from 33 1/3 %. As you will recall, we acquired our original one-third interest in June 2003 as part of our acquisition of a package of assets from an affiliate of El Paso Corporation.

The principal asset of the Atchafalya Pipeline LLC is the Atchafalaya pipeline system. This system receives crude oil from ANR pipeline, CMS Trunkline pipeline and a barge dock in Patterson, Louisiana, and delivers crude oil to tankers controlled by PAA at Gibson. From Gibson, the crude can be delivered to various pipeline systems including the Capline system, the X frontline (phonetic) pipeline system that's currently transporting approximately 13,000 barrels a day of crude oil.

We believe that this asset is well positioned to benefit from increasing volume of crude oil production in the Gulf of Mexico. This bolt-on acquisition, when combined with Capline and our existing business activities in the area, gives us a strong presence in the area and positions us to take advantage of future opportunities along the Gulf Coast. A

As we have noted in the past, making an acquisition is really the easy part. Integrating the required assets, in our companies, into our existing systems and operations, and making sure that they generate the targeted economics returns is the challenging part. And, in that regard, in addition to pursuing new convictions, we have completed the integration of all of our newly acquired assets. Also, with the exception of the SCADA system on Capwood, which we will have integrated by the third quarter of this year, we will have the Capline and Capwood assets fully integrated into our system from the day we close.

In addition, we are making very good progress on implementing the post-closing capital program, on both the ArkLaTex and Red River assets we acquired in 2003. We closed on the ArkLaTex assets on October 1 and have initiated a post-closing capital program. The program will cost about $8 million and will primarily involve line repairs and replacements, upgrades to measurement facilities, SCADA and cathodic protection equipment, and connections and expansions designed to optimize crude oil flow, as well as the shut-down of certain assets that we consider uneconomic or which present unwanted operating issues. We anticipate completing the program by the end of 2004.

We are also on schedule with respect to upgrading and refurbishing project on the Red River pipeline system that we acquired from BP last year. As you will recall, the plan was to spend about $14 million to upgrade the line and complete a connection to our Cushing facilities. The Cushing connection was completed in August, 2003, and we're on schedule to complete the line upgrades by the fourth quarter of 2004. We estimate spending approximately $9 million in 2004 to complete this project. Since we have acquired this system, we have increased volumes on the line from 8,000 barrels a day to 14,000 barrel per day, and the pipeline capacity is 20,000 barrels a day.

In west Texas, we continue to build out our presence along and around the assets we acquired from Shell in August of 2002. In October of 2003, we completed construction of two 100,000-barrel storage tanks along the Permian Basin gathering system, which is west of Odessa. In December we completed the construction of three 80,000-barrel tanks at our Midland tank farm. The total cost for these two projects was approximately $12 million, and we fully expect these tanks will lower our costs in this area in 2004.

Earlier this month, we announced that we have decided to proceed with the planned expansion of a segment of the Basin pipeline system. The pipeline segment to be expanded extends approximately 345 miles from Colorado City to Cushing, where it interconnects with our Cushing terminal, other crude oil terminals and major pipelines bound for the Mid-Continent and Midwest regions of the United States. The expansion project principally involves reactivation of several pump stations that were shut down prior to the time we took over operations in August of 2002.

Upon completion of the expansion, total capacity on this segment of the pipeline is expected to increase approximately 15% from its current capacity, which is 350,000 barrels a day, ultimately be up to approximately 400,000 barrels a day. At times, this pipeline is operated at levels that are close to its current maximum throughput, and we would like to be in a position to handle increased volume if market conditions warrant. The cost of the expansion is approximately $1.1 million, and we expect the project to be completed March, 2004.

In addition, we have also initiated a 29-mile pipeline construction project that will connect the I-team system that we acquired this year from Navajo to the Basin system in Colorado City. This project will cost approximately $6 million, and it will reduce the cost of getting the volumes into into the Basin system, and at the same time will free up capacity on the middle of the Colorado City segment of the line. We expect to complete the project during the second quarter of 2004.

In January of this year, we announced that we will proceed with Phase IV, expansion of our Cushing terminal. Under the Phase IV expansion, we will construct approximately 1.1 million barrels of additional tankage at the facility. The Phase IV expansion project will expand the total capacity of the facility to approximately 6.3 million barrels, and is expected to cost approximately $10 million. The estimated completion date for this project is the third quarter of 2004.

Before I turn the call over to Phil, let me provide a few additional operating metrics that have been incorporated to Phil's 2004 financial guidance. We are currently projecting OCS volumes to average 56,000 barrels a day in 2004. This forecast is consistent with our historical methodology for the system, which represents about a 7% decline from 2003's average daily volumes of approximately 60,000 barrels per day.

In addition, effective January 1, 2004, based on the contractual escalator, the average tariff increased approximately 6%, which, from a revenue standpoint, largely offsets the expected volume decline. We understand that Plains Exploration and Production is anticipating drilling activities on the Rocky Point structure to commence in the second quarter and we look forward to the results in their endeavors. However, at this point, we expect any positive impact from the drilling could affect us at the very end of 2004, at the earliest, and most likely in 2005.

On the Basin pipeline system, we anticipate that daily volumes on our share of the system will range between 250,000 barrels a day and 300,000 barrels a day. And our guidance anticipates that the volumes will average 270,000 barrels a day, which is consistent with the original acquisition forecast and also the preliminary 2004 guidance that we provided in October of 2003. As I noted earlier, we presently forecast that our Capline interest will average approximately 117,500 barrel a day for the 31 days of the quarter, and that we will -- that we'll only ask that that if we close that first, which is-- we will contemplate. And then for more information regarding our guidance assumption, please reference the 8-K filing made this morning.

Let me wrap up my part of today's call by stating that, though not without its challenges, 2003 was a great year for us operationally and for our expansion efforts. As you can see, 2004 is shaping up to be a strong year, as we all look forward to our continued success. With that, let me turn the call over to Phil.

Thanks, Harry. During my part of the call, I will review our capitalization and our liquidity at the end of the year, and discuss our recent financing activities, expanding on a few of the points Greg referred to in his introduction. In addition, I will also want to briefly recap our capital expenditures for 2003. And then, finally, I am going to walk through our financial guidance for the full year, and specifically for the first quarter of 2004.

Our credit stats were extremely strong at year end. Our long term debt to total cap ratio at December 31 was approximately 41%. Excluding the items impacting comparability, our EBITDA to interest coverage ratio for the quarter was approximately five times, and our long-term debt to annualized EBITDA was approximately three times. If you adjust the year end balance sheet to include the effects of the Capline acquisition and the $28 million dollars of crude oil advanced payment that were used to reduce our long-term debt, then our long-term debt to total cap ratio was approximately 48%, and our forward-looking, long-term debt to EBITDA ratio was about 3 1/2 to one.

Our liquidity position at year end was also exceptionally strong, with aggravate availability under our revolving credit facilities at the end of the year of approximately $597 million. When taking into account the additional debt incurred in connection with the Capline acquisition, we will have available liquidity of approximately $455 million, excluding the capacity on our uncommitted hedged inventory facilities.

The fourth quarter was a very busy time for us in the capital marks. On November 21, we refinanced our senior secured credit facilities with new unsecured credit facilities which totaled $750 million, and also a $200 million uncommitted facility for the purpose of financing hedged crude oil. The new credit facilities increase our flexibility as well as lower our costs of capital on that portion of our capital structure by approximately 100-plus basis points compared to our prior credit facilities. Primarily because of the change in structure and tenor, we recognized a non-cash charge of $3.1 million in the fourth quarter that was related to unamortized debt issue costs associated with the old secured facilities.

As a result of the refinancings, the rating agencies removed the notching on our senior unsecured rating, and upgraded the ratings on our publicly traded bonds. In late November, S&P raised our senior unsecured rating to BBB- from BB+. And then, in early December, Moody's raised our senior unsecured rating to BA one. They affirmed our senior implied credit rating of BA one and also placed us on a review for a possible ratings upgrade.

In early December, with positive credit momentum and an attractive market for corporate bonds, we launched a $200 million offering of 10-year senior unsecured notes with standard investment grade covenant package. The offering was very well received, and we upsized the transaction to $250 million and we priced the 5 and 5/8% notes of a slight discount to yield approximately 5.7%. As Greg alluded to earlier, this represents a spread of 125 basis points over the applicable 10-year Treasury, which is a significant improvement over the 395-basis-point spread that we received on our inaugural offering of 7-3/4% senior notes in September of 2002.

On December 16, we announced that we had entered into a definitive agreement to acquire the Capline and Capwood interests from Shell, and we moved quickly to pre-fund the equity portion of the purchase price. On December 18, we sold 2 1/2 million common units at a public offering price of $31.94 cents per unit. Including $340,800 units associated with the exercise of the underwriters over-allotment option, we received net proceeds of approximately $88 million, net of operating expenses and including the general partners' proportionate capital contribution. And net proceeds from the offering were used to reduce debt outstanding under our various credit facilities.

As a result of these capital marks activities, as of December 31, 2003, our outstanding long-term debt had an average life of approximately nine years. In addition, we now have a fixed-to-floating ratio of 87% fixed, and 13% floating, on our year-end long-term debt capital structure, and our weighted average interest rate is approximately 6.1%. As adjusted for the closing of the Capline acquisition, our floating interest rate exposure is approximately 32%, and our weighted average interest rate is approximately 5.3%.

Not included in those statistics is approximately $25 million of working capital borrowings under our revolver and $100 million borrowed under the hedged crude oil facility, both which are cost by the short term. These borrowings are primarily related to margin deposits, hedged LPG purchases and then, of course hedged crude oil.

Before moving on to guidance for 2004, I want to recap our total capital spending for 2003. Our final total of $253 million includes the $16 million that we deposited as earnest money with Shell for the pending Capline acquisition and a $24 million accrual for the CANPET earnout payment. The earn-out payment will not be made until April of 2004, but all requirements were met as of the end of last year, resulting in the recognition of the deferred purchase price amount at December 31 of 2003. Excluding these amounts, our expansion capital for the year totaled $213 million, which includes the acquisitions Harry completed during -- or acquisitions completed during the year, as well as the various expansion capital projects that Harry discussed earlier. The final number's right on top of our estimate at the end of the third quarter, which was $211 million.

Maintenance capital for last year came in at $7.6 million for the year, about $900,000 less than the $8.5 million that was estimated at the beginning of the year, and about $700,000 more than our estimate at the end of the third quarter of last year. Line fill purchases for this year, which include crude oil line fill purchasing in conjunction with acquisitions, as well as ordinary course of business changes, totaled approximately $53 million for approximately 1.8 million barrels, and that's generally in line with the estimate at the end of the third quarter of 1.7 million barrels.

Let me now shift to a discussion of the partnership's overall financial guidance for 2004, as well as specific guidance for the first quarter of 2004. Our guidance is based on the current state of the market, and reasonable expectations of 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 the estimated contributions from recent and pending acquisitions.

As we did last year at this time, we caution that you there is a higher variability associated with forecasting performance for the first quarters and the fourth quarters 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 accounting charge associated with the vesting and LTIP grants separately at the end of this section.

Subject to the all the caveats previously mentioned, we would currently guide to you a EBITDA range for this year of $195 million to $201 million. The midpoint of $198 million is approximately 14% above our 2003 actual EBITDA, excluding the accounting charges, and reflects a March 1 effective date for the Capline acquisition.

I would point out that our guidance does include an estimate of G&A expenses to triple (phonetic) to the Sarbanes-Oxley requirements, with espect to management's testing and assertion, as to the adequacy of internal controls, and the outside auditors opinion on our assertion. However, we really don't have much in the way of historical guidance to accurately predict these costs, and caution that some fine tuning may be required during the year. The guidance that I'm giving you also excludes the expected LTIP charges that, as I noted, I will cover separately in a few minutes.

We expect segment margin for the year to be between $251.9 million and $257.3 million. Excluding the acquisition of Capline, we anticipate spending approximately $51 million in expansion capital this year. Approximately $16.2 million is associated with implementing capital programs related to the acquisition of the Red River pipeline system, and the ArkLaTex pipeline system.

An additional $10 million is associated with the Phase IV expansion in Cushing, and $6.8 million is related to the capacity expansion on the Basin pipeline system, and construction on the pipeline spur that will connect our Iatan pipeline and gathering system to our Basin system in Colorado City. The remaining $18 million is associated with various other organic growth projects, and our maintenance capital is expected to be around $12 million for 2004, with the increase over last year's level, primarily related to the Capline acquisition. We're also budgeting the purchase of approximately 200,000 barrels of crude oil line fill throughout the year.

We expect G&A for the year to be in the range of $56.3 million to $56.9 million. Annual depreciation and amortization expense is expected to range from $56.9 million to $57.3 million. Interest expense is expected to range from $38.9 million to $39.4 million, and is based on a weighted average debt balance for this year of $694 million, and the current interest rate environment. Interest expense reflects approximately $1.4 million of non-cash expense to reflect amortization of interest rate hedges that were terminated in December upon issuance of the unsecured notes.

I would point out that $450 million of our year-end debt balance of $519 million is fixed at a weighted average interest rate of $6.6 million dollars. Based on these estimates, we forecast net income of $98.4 million to $105.3 million for the year, or approximately $1.53 to $1.64 per limited partner unit generating a midpoint target of $1.59 per unit. Specifically for the first quarter of this year, we would guide to you an EBITDA range of $44 million to $47 million, midpoint of $45.5 million. And that, again, excludes any LTIP-related charge. This range is based on estimated segment margin of $59 million to $61.7 million.

We estimate first quarter G&A to come in at approximately $14.7 to $15 million dollars. For interest expense purposes, we'll anticipate average debt balances of approximately $585 million during the quarter, resulting in interest expense of $9.2 million to $9.4 million using a weighted average interest rate, which approximates 6.4%, and includes our hedges and our revolver commitment fees. For the quarter, approximately $400,000 of interest expense is expected to be non-cash.

Finally, we estimate DD&A to be approximately $13.2 million to $13.4 million. Based on these estimates, we forecast net income of $21.2 million to $24.6 million. That equates to 33 cents to 38 cents per diluted unit.

Our update guidance for the first quarter and full year 2004, and the assumptions associated therewith, are set forth in the 8-K that we filed this morning. I would point out the updated guidance includes the Capline acquisition from its target effective date of March 1.

As we mentioned last quarter, we will have carryover LTIP charges in the first and second quarters, due to the accounting methodology that is required. In addition, we estimate we will have some minor amount of incremental LTIP investing in the third and fourth quarters. We estimate these charges and the associated employment taxes will total approximately $4.5 million with approximately $1.9 million in the first quarter, $.6 million in the second quarter and then $2 million in the second half of the year. I would point out that the amount of these charges are dependent on our unit price at the time and are, therefore, subject to variability. Our 8-K breaks out these charges.

In addition, consistent with past practice, we do not attempt to forecast any potential impact related to SFAS 133, as we have no way to control the 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. On an annual basis, the comparative non-cash mark-to-market impact of SFAS 133 has been minor, but it's been much more significant on a comparative quarter basis.

One last item I want to mention is that our guidance, with respect to net income per unit, is based on the current distribution level of $2.25 per unit per year. The portion of the general partners distribution that relates to the incentive distribution right is deducted from income available for limited partnership units. Accordingly, as you prepare your models and insert your own assumptions as to future distribution increases, please keep in mind that, for every assumed 5 cents per unit increase in the unit distribution, limited partner net income per unit will decrease approximately 1.6 cents per unit, even though the partnership's aggravate net income amount will not change. This relationship will remain true for as long as we are in the 25% and same split.

For more detail with respect to assumptions used in our guidance, again please reference the 8-K that we filed this morning. With that, I will now turn the call over to Greg.

Thanks, Phil. 2003 was clearly a successful year for Plains All American, and, as is evident from Harry's and Phil's comments, we are also excited about our prospects for 2004 and beyond. However, before I talk about 2004 goal, I just want to add a little color commentary to Phil's 2004 guidance.

Like all public entities, PAA faces the challenge of absorbing costs associated with the implementation of changes associated with the Sarbanes-Oxley Act, as well as a multitude of other corporate governance and financial reporting initiatives imposed on us by the NYSE, the SEC, and just recently the FERC. Given our extensive assets in the pipeline and terminal sector, we also face increased costs associated with the recent imposition of rules and regulations regarding pipeline integrity management and API 653. On top of that, because of the September 11th event, and the terrorist threat to our nation's energy infrastructure, we are also having to absorb costs associated with additional security requirements imposed on us by the Office of Homeland Security.

During our April 2003 conference call to discuss first quarter 2003 results, we discussed many of these items and their potential impact at length. We did this, not because we wanted to bore you or burden with management's challenges, but because they represent incremental costs not included in our historical results that are hard to estimate, and to a very large degree, they are beyond the control of management. I mention this now because our projected costs associated with these activities increased substantially over what we were estimating in mid-2003.

Our estimate for Sarbanes-Oxley compliance now totals approximately $2.6 million for 2004, which is roughly double what we had originally estimated, and we hope it doesn't grow beyond that level. Under the pipeline integrity management rules, each time we make an acquisition, we integrate the seller's integrity testing schedule and planned expenditures into our program.

Once a year, we are required to review our assets that follow under DOT jurisdiction, including the acquired assets to ensure we are addressing the highest risk assets first with our integrity management program. That review can result in the acceleration of certain expenditures in the earlier periods than was originally forecast, as well as overall increases if testing discovers an unexpected condition that requires additional expenditures. Acquisitions can also cause increased expenditures relating to API 653. Beyond that, security and health and environmental and safety matters are also extremely high priorities, and they're also very, very dynamic, which means they change.

I share those comments with you because, despite a projected $5 million year-over-year increase in costs associated with these activities, the guidance that Phil provided with you is still very much in line with the preliminary 2004 guidance we announced at various times in 2003. In part, this was possible because certain of the acquisitions and capital expenditures that we made in 2003 are expected to perform better than our initial forecast. However, the primary reason is that PAA's employees have worked very hard to find ways to save costs in other places, generate more revenues from the same assets, and find ways to be more efficient without sacrificing overall effectiveness, and I did want to take this opportunity to express appreciation to all of our employees for that result, and offer them encouragement to keep it up. We are going to need it.

Achieving our goals for 2004 is by no means a layup, but with the continued commitment of the entire PAA team, we believe we can make it happen. With that prelude, let me briefly review for our full principal goals for 2004, And also talk about the alignment of interest between our senior management and our unit holders.

At PAA, we've always maintained a focus on fundamentals and high standards of performance. Therefore, it should come as no surprise that our goals for 2004 are very similar to those we established and achieved in 2003. Specifically, our goals for 2004 are to, number one, deliver operating and financial performance in line with our guidance. Number two, to improve our credit rating and preserve the strength of our balance sheet and credit profile. Number three, increase our distribution to unit holders by approximately 5%. And four, position the partnership to -- for continued growth for executing our organic expansion projects, and pursuing our target of averaging $200-$300 million per year of accretive and strategic acquisitions.

Because of a multitude of unknowns, achievement of these goals is by no means a certainty. But we do believe we are well positioned to achieve these goals and solidify Plains All American's position as one of the premiere midstream companies in North America. Specifically among crude oil midstream entities, we believe we are also favorably positioned to optimize our positions 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.

In addition, our management team is committed to continuing its multi-year track record of growth and value creation. Not only do we have one of the sector's strongest balance sheets, but I believe we have one of the group's deepest benches of management talent and with significant industry experience in leadership roles throughout the organization. Our senior management team holds substantial equity in Plains All American, which ensures that their interests are well aligned with those of our unit holders. Some of these holdings resulted from their retention of performance-based incentives, but a far greater portion came from hard cash out-of-pocket investments, in the general partner and common units.

While perhaps not on the same absolute dollar scale as a Kinder Morgan or an enterprise products, the amount of our senior -- the amount that our senior management team has invested in PAA is very meaningful on a relative basis. I personally have worked with many of these individuals for over 20 years, and can tell you that, unless they won the lottery in the last couple of weeks, I can assure their investments in PAA represent a significant portion of their overall net worth, and the distributions from their holdings that they receive each year represent a significant portion of their annual cash flow.

Let me close by stating that we are optimistic about 2004 and beyond, and want to express our appreciation to our employees for their hard work and sacrifices. On behalf of Plains All American and our entire work force, we thank the analysts that cover PAA, our investors and customers for their trust and continued support, and we look forward to updating you on our progress in future conference calls. In the meantime, we encourage you to monitor our progress and our results by visiting our recently redesigned corporate web site at www.paalp.com. And I would specifically encourage you to take advantage of the "My PAA" section of the site, which allows you to sign up to receive our corporate communications via e-mail and also allows to you edit your contact information.

That wraps up the items on our agenda today and we thank you for your participation in today's call. For those who joined us late, a complete written transcript of the prepared comment for this call will be posted on our web site shortly after the conclusion of the call. Danny at this time, we are ready to take questions.

Ladies and gentlemen, the floor is now open for questions. If do you have a question, please press the numbers one followed by four on your telephone key pad. If your question has already been asked and you would like to remove yourself from the queue, please press the pound key. Please note we ask that you do pick up your hand set while posing the question to provide optimum sound quality. Once again ladies and gentlemen to pose a question please press the numbers one followed by four. Our first question comes from David Fleischer with Cane Anderson.

Hi, Greg. I believe you indicated that, excluding that prepayment, your cap ex in 2003 was $213 million. And I think that you indicated separately your acquisition figure in '03 was $160 million. So, by subtraction, I believe that would indicate that you had internal investments of $53 million, I guess, and I think you mentioned something about that number. So, my question is, what sort of return are you targeting, do you expect to get on those internal investments, if that's the right figure? You know, I understand it's not all going to all come at once. It's as it comes on and it doesn't match the years necessarily, but then I think separately you indicated for '04, that you were targeting 51 million dollars of internal investments, cap ex. So I'm wondering what you're expecting to get from those investments, what kind of return?

Sure. Dave, as you mentioned, each project is, you know, kind of unique. What we have found is that these organic growth opportunities, if you will, kind of spin off in many cases, acquisition-related activities. For instance, as we build up west Texas, we've also found ourselves building up Cushing, so we integrate those concepts, ut we -- each of them has a separate stand-alone return that contributed to the bottom line. What we have experienced roughly is that organic-growth-type projects will average somewhere between four and a five multiple on there. So it's in the, you know, call it 20% return range. Whereas our acquisitions, we've been post-implementation of our exploitation program, you know, will range anywhere from 6 1/2 to 8 1/2, depending upon, you know, each individual acquisition.

Okay.

And when I say (inaudible)- that is a multiple, so the inverse would be returns in the mid-teens.

Right. I guess the point I want to get to and try to understand better is, you know, you earlier have made some substantial acquisitions such as Basin, where you paid a higher multiple. The second category, you know, is -- i,s the category of both the acquisitions where you can mix some of the smaller acquistions at lower multiples as you have been doing and then these organic figures of investments that give you the highest return. I'm wondering, you know, how you can help us understand what the mix of these investments going forward might be? Can there be periods like -- there should be more multi-acquisitions versus the large ones, and more organic growth, and that, therefore the returns on your total dollar investments going forward should be higher.

Yes to everything you just said. Certainly, for instance, in 2003, we didn't make any, you know, singular large acquisition. Most of these were smaller bolt-on, but there was a lot of them, so there was, you know, 10 total.

Phil and I and Harry like it, because it's -- those are the best return projects, as opposed to in that range of 6 1/2 to 8 1/2, there certainly is a multiple. They're generally on the lower end of that because the synergies that we get as a percentage of the purchase price are much higher. And so, you know, as we go into 2004, with the Capline acquisition, as Harry mentioned, we've already started kind of with bolt-ons, pre-bolt-ons in some cases, to expand our footprint in the Gulf Coast area and so we would hope, David, that would we would be able to, in 2004 and beyond, continue to, in effect, assimilate a very integrated system by making these bolt-on acquisitions. So it is hard to predict the mix.

If your question was, you know, how many of these can I count on you making in 2005, or even the latter half of 2004, it is real hard because we know what we want to own, we just got to make the seller sell it to us at a price we want to pay, and hopefully our competitor don't overpay. But, as far as the organic growth projects, you know, we would probably characterize our opportunities as net-of declines that we see over the next several years, in areas that we do have assets. You would hope we would still be able to generate organic growth in the one-to-three percent range, and as we model that, -- and that's on EBITDA, David. As we model that, we generally include capital in there that roughly generates, you know, a four-to-one EBITDA-to-investment kind of return. And so it is -- it is very opportunity-specific, but with the kind of track record we've had over the years, we feel pretty comfortable with stating those as kind of our targeted conclusions.

Okay. Second question. I would like to just understand a little bit better what you -- you indicated as far as the governance and security, you know, issues and costs there. I believe you said that there was going to be a $5 million year-over-year cost increase. So, you're meaning in '04 versus '03 with that $5 million figure, and can you break down, you know, what that number really was in total in '03? You said it was -- I think Sarbanes-Oxley, you gave us those numbers alone for Sarbanes-Oxley. What was the $2.6 million, or--?

Yeah. What we said, for API 653, pipeline integrity management, and Sarbanes-Oxley in '03, and these are more direct costs than they are ancillary. I'm kind of frightened to figure out what the ancillaries are, because there is a ripple effect anytime you do something. But on what we could we get our arms around, we spent about $1.6 million in '03, related to those three items. And that was broken down 100,000 (dollars) so on API 653, about a million dollars on Pipeline Integrity Management, primarily testing, and then the Sarbanes-Oxley Act was between 500,000 (dollars) and 600,000 (dollars).

For 2004, our budget, for things that we think we need to do, and should be doing, API 653 is about $2.3 million, Pipeline Integrity Management is about $1.8 million, and then the Sarbanes-Oxley is the $2.6 million I mentioned earlier. When you total all those up, it is an incremental cost of about $5 million. And, again, I would refer back, I think somebody accused me in April of 2003 of getting on a soapbox. But one of my comments in that conference call as we were talking about, is what keeps us up at nights are these types of costs that you really don't have a direct way to pass those on through your rate base, because you are at market-based rates. And what you hope is, is that all the prudent things you're doing that are costing you money, your competitors are doing, so that, by design, that everybody has to build additional profit margin in to cover those.

What I was real -- felt very fortunate about is, that as we had to revise our estimates throughout the year as to how much we were going to have to spend in '04, we were able to very much stay in line with the overall EBITDA guidance, net of those costs, for the reasons I talked about earlier. It is just basically assets generating more and our people finding ways to squeeze more out of them.

Okay. Thank you.

Thank you, David.

Next question is from David Maccarrone with Goldman Sachs.

Thank you. Phil, I was wondering, I don't think this is on the 8-K but I was wondering if you could discuss your expectations for operating cash flow and working capital, specifically for 2004?

Well, operating cash flow, under the GAAP version of the cash receipts aspect, David?

Right.

We make a projection for that, but, given the fact that we the way we actually will have to report it is, you know, it is based on receivables, payables, collections, if somebody pays us five days late and it straddles a quarter end, it actually, you know, significantly influences, you know, the cash flow, is what we look at is pretty much on the working capital basis.

I think in our working capital assumptions, as we go forward, I've got Al Swanson here as our Treasurer, I think we, as we've been disclosing, we actually anticipate that sometime in 2004, some of the prepayments that we have been getting from our customers we won't need to get to secure the credit. So we expect, in effect, working capital requirements to go up about $30 million. Is that right, Al? And then, everything else is pretty much business as usual, subject to the vagaries of, you know, cash flow wires and receipts that come and go. So, I really don't expect much in the way of abnormalities outside of that.

Okay. And then, on David's question of pipeline integrity, I think you had indicated it was a million dollars in '03, going to $1.8 million in '04. The bulk of that is on Capline, I assume?

No. Actually we won't have hardly any on Capline. They pretty much -- one, we're a non-operator there, with 22%. I think they ran most of their smart pigs last year through that system, and so we're actually forecasting not that much in the way of Pipeline Integrity Management. I do think our forecast for Capline for maintenance cap ex had included in it about $2 million a year, Harry?

Yes.

A little over. Yeah, that is going to include some aspects which may be the fallout of some of the pipeline integrity management.

David, part of the reason that we've been very fortunate, knock on wood, besides having outstanding great operators, because I know our people are listening to this, and that is a true statement, is that, as we built our pipeline base, and today, we own, I think I counted last time like 26 different systems, whereas, when we went public in 1998, I think we owned only two or three.

So, we've added a tremendous number of pipeline systems. And I will tell that you you never do as much due diligence and you never know your system as well as the day you acquire them. And so the idea of smart pigs had actually been developed before we went public in 1998 and we embraced those wholeheartedly, so that when we actually buy assets, we either require that they have a smart pig run, or we build into our purchase price, and our operating costs the assumption we are going to have them run. So we've been able to, in effect, stay on top of this thing, a little bit better than we would if we had a great big legacy asset base that had not been smart-pigged and all of a sudden out of the blue you're going to start incurring costs to go after those.

To look forward, you know, by the end of '04, in the context of getting half of your high consequence areas, I believe it is called, complete by December of '07, what percentage of those areas will have been tested by the end of '04?

We are required to have 50% tested by September of 2004.

50% by September of '04?

Yeah.

And that's -- and that's on track?

Yes.

Okay. And what about the remaining costs to complete that? And the time period?

Are you talking about the remaining 50%?

Yeah.

Well, by design, those get to be harder to estimate, Dave, only because, by design, we've got the highest consequence areas up front, so we hope those are the most expensive. So, as we go forward in time, we hope those costs decline, and they're not as significant, you know, in terms of -- they might have been otherwise if we hadn't bought these assets recently. There will be an ongoing cost and expense, you know, probably, Harry, in the million and a half--

Million, million and a half.

But the difference, you know, if you look at our system, the crude oil pipeline systems, they are out in west Texas, and you know, a lot of the assets are in the San Joaquin Valley. So they're not in high, you know, highly sensitive areas to start with. It is not like our assets are going into the City of Austin, or into major, you know, metropolitan areas, where you have a much higher cost to you know, to perform your pipeline integrity work if you have an issue. So, I mean we're probably going to be in the million, million and a half range, consistently, because every five years, we have to go through the same process again.

Okay.

I mean, David, if you're, as we are, looking for areas of exposure, and you know, adverse surprises, the area that we're keeping our eye on right now is there is a directionally a push towards -- right now, pipeline integrity management applies to regulated pipeline systems under D.O.T. His question is whether that extends to unregulated. Now, by nature, most of the regulated pipelines are larger-diameter pipes which can accommodate, you know, the smart pigs.

If they took it all the way to, let's say, you know, small gathering systems, the two-inch, you know, kind of gathering lines, they don't have the technology yet available today to be able to test them on the same basis. And hydro test them, in some cases, wouldn't make sense. You would be better off just to truck, as opposed to to try and deal with some of those. So, I mean, those are the things that we will keep our eye on and when we file our 10-K, you will see us as well as others, focusing in on the fact of the unknown which is probably several years away but is still coming toward us at some rate of continuing pressing on costs on to the pipeline operator, including them in the nonregulated areas.

Okay. That's very helpful. Thanks, Greg.

Thank you.

Our next question comes from David Bulllock with Sandal Asset Management.

Hey, Greg. Congratulations on '03. You know, your '04 guidance assumes that the oil markets return to normal, and you say that that includes some volatility but not that experience during '03. Do you assume the market remains in backwardation?

As a general rule, yes, David. If it goes out of backwardation because we have so many other assets that participate when they go into contango, it doesn't really change our answer tremendously. If it was to go into a sideways market like we saw at the very end of 2001, I believe it was, you know, it could hurt us. But, generally speaking, we may have a quarter within a rolling six-quarter period as the market goes from backwardation into contango. That is kind of offtrack, but on average, we're going to make that up somewhere else. What we try to do is, we're trying to project on an average market. The idea is that there is more volatility than last, we probably are going to benefit. If the answer is it shifts into contango, one of the quarters in there is going to get hurt. But on the cumulative basis, I would say the four or five quarter period is going to be in line with what we have kind of guided everybody to, wouldn't you say, Harry?

Yes. I mean, we probably have $1.5 million worth of variability on a transitional market in a given quarter. Does that make sense?

Okay. Yeah. Does the estimated average volume of 552,000 barrels per days for '04, does that assume any convictions beyond the Shell assets, and the 51 million of expansion capital?

No, the Shell assets really won't affect our gathering volumes at all. Those would be more on the pipeline transmission. But you know, clearly we've got issues that we wrestle with every year, which is you've got depletion, you know, one producer's not drilling and another producer is, and our job is to make sure we at least offset barrel for barrel that which we lose to depletion with either incremental production from some place else or incremental market share. But, you know, and we certainly look for acquisition opportunities all the time.

It is generally easier for us to make acquisitions of gathering market-related assets when the market is not in pronounced backwardation, just because other people's margins are getting hurt. And, as I mentioned earlier ours are kind of stabilized because of the counter cyclical balance of our asset. So we'll certainly keep our eyes open and I would tell if you we do go into contango, generally speaking, there is generally opportunities for us to either capture a little bit more market share or, alternatively, to make acquisitions of gathering-related companies.

And what-- the same question on the pipe volumes of a million barrels a day for the-- well, was that the -- what is the full year average, a million one barrels a day? A million two barrels a day?

And that includes, by the way, the Capline acquisition closing on March 1.

Right. Any other acquisitions in there?

No. No. Last year, we included -- last year being '03, we had three transactions that were in very, very advanced stages of negotiation, and they were small and we had actually three or four of them. So we included three in our guidance because we wanted to make sure we got the capital in there. This year we don't have any of those smaller acquisitions at that far of an advanced stage to be able to include them, so pretty much it is a continuation of our current business, with the exception of adding Capline,which is under contract.

Okay. Thanks, Greg.

Thank you.

Thank you, Mr. Bullock. Once again, ladies and gentlemen, to pose an audio question please press the numbers one followed by four. Our next question comes from Ronald Londe with A.G. Edwards.

Thank you. Greg, I'm curious, can you give us some projections or insight into the offshore California production, how it might affect you in California?

The safe answer for me to tell you what we've got in our projection, Ron, and then I will kind of address in general. In our projections, we really have no projected benefit in 2004. As Harry mentioned, if it does have a benefit, it is probably at the very end of 2004, most likely to benefit 2005. And I think it is, you know, at least in our models, historically, as we've been managing our business, we've been assuming that OCS production will decline at an average rate of about 7%. You know, an actual well decline rate is more pronounced than that, but it is the work-over in the drilling activity that, for the last several years, that 7% number has been very, very good. And as it turns out, our revenue stream has been about stable because, as it turns out, the decline has been offset by tariff increases as provided under contract.

To the extent there are incremental volumes, it could be, you know, fairly meaningful to us, if it breaks the trend and starts to either reduce the decline or, you know, if God loves us, maybe offsets it, because effectively a 5,000 barrel a day difference would have, I think it is a 3 million, 3.2 million dollar a year impact on cash flow and on a per unit basis that is not hay. So, you know, I can speak from my recollection, when I was also CEO of the company that owned the offshore field, one of those out there that they have received a permit, and that's at the Rocky Point field to be accessed off Point Arguello. And there was several main -- I think it was in the order of 40 to 80 million barrels of recoverable potential out there that was not on production while I was there. I think the new management team has done a great job of going after the permits they need to access those. They now have those permits in hand.

My understanding is a drilling rig should be in position and ready to go sometime in the second quarter. That drilling activity would hopefully, as again, minimum, reduce the decline and potentially add incremental volumes beyond even the decline curve that we see. So, I hate to sidestep your question, but, you know, prying to predict what Mother Nature is going to allow you to produce, especially in California, s a little bit hard. But we're hopeful, and it is certainly not something we've had the benefit of in the past for something like this and so we don't think it can hurt us and it certainly can help us.

I know you're building some capacity, you've announced building capacity, in Cushing, tankage in Cushing, and I know you've got plenty of throughput capacity, header capacity. Are you reaching your limit in capacity for tankage and that's why you're adding to the tankage? And also, could you address any kind of shift in ownership of tankage in Cushing and how that might affect you?

When you say are we reaching our capacity, we -- what we have right now, we have, through various -- the way we integrate our strategies, and we enter into hedging arrangements with respect to our lease barrels that we control at the lease level, which is the roughly 500,000 barrels that David Bullock mentioned earlier, and we basically sell those into the market.

Clearly when the market goes into contango, we are able to take those barrels and deliver into our tanks in Cushing. And, in some cases, a one-month delay when the market's in contango can get you a much higher price for that barrel, and that's what provides the counter-cyclical balance. That's a simplified version, but it does work that way. So, as we grow our lease basically basis we keep our eyes on how many tanks we need to provide that counter-cyclical balance.

We also are constantly having discussion with customers who want to lease barrels, and to the extent we are engaged in the discussion and want to lease them barrels that we have previously been using to hedge our lease gathering barrels, we need to consider, you know, building tanks. We think we have a competitive advantage with respect to our cost of our tank construction, because our facility is the only one up there that was designed to be expanded by a significant magnitude. So, post this current expansion phase, we will be at roughly 6.3 million barrels, I believe, of total capacity. We had originally designed that to be able to be built to at least 10 million barrels, and in reality we think it can go much farther than that and we certainly have the land position to be able to do it.

And so we kind of keep all those factors in mind, and when a guy shows up in my office and says "Greg, f you build me another million barrels of tanks, I can deliver, you know, a 20% annual return for that," that's an easy decision. And so, so far, we haven't run out of opportunities, to build tanks so generate attractive returns, and these guys are, you know, working on the next million barrels as we speak. So if they can develop those kind of opportunities to put those to work, that's great.

As far as the shift in ownership, you know, with this expansion phase that we have in place, we will have 6 million out of roughly 28 million barrels in Cushing, so we're, you know, -- not the large player that, let's say, a BP is, where BP, I think, has got 11 to 13 million bare barrels with that. Shell previously had owned roughly 6-8 million barrels of tankage in Cushing. And they have sold that, or I think, have sold it to I think Enbridge. And I will just leave it that, while they certainly have some tanks, we certainly think we have the prettiest tank in the race, in terms of the age of the tanks and the capabilities, and comment beyond that probably wouldn't be appropriate.

The $51 million in capital spending that you planned to do on various projects in '04, can you break down, you know, what quarters they are going to fall in, and maybe the magnitude of each? The Red River, the ArkLaTex, and such?

Yeah, you know, unfortunately, I don't have my plan right here in front of me, but Al, you want to speak to that in general?

I don't think it -- I think our 8-K disclosed the first quarter numbers for cap ex spending. And then the rest of it is fairly equally spread between the second and third quarters, with fourth quarter being a little bit lower. I don't have the actual detailed numbers in front of me.

Save that, and we will get back to you Ron if this needs to be refined further. It is probably a bell-curve kind of shape, with the second and third quarters being the highest concentration. For instance, our -- we're -- the Iatan system is going to be completed in the second quarter.

Middle of April.

And so it is going to be, you know, second and third quarter is where the biggest lump of capital is coming in.

Okay. Thank you.

And what I will also say is that, because of the expenditures on income-generating assets like that being spent throughout the year, we certainly hope and expect our exit rate of cash flow generation capacity, we use the term EBITDA, will be, you know, much higher than what it started out at the beginning of the year. So we're optimistic that our issues and our opportunities in 2005 to continue to report very strong results on a year-over-year basis, are being bolstered by the fact we're spending this capital today.

Thank you.

Thanks, Ron.

Next question comes from Andrew Pruitt with Steadfast.

Hi, you can hear me?

Certainly can, Andrew.

I have a question for you on the cash flow for the quarter. It was -- from operating activity is, it just showed a wide swing between negative, but then it seems to be offset on the net change in assets and liabilities. I was just wondering if you could speak to that? Thanks.

Go ahead, Phil.

It has a lot to do with the fact that we were in contango, Andrew, at the end of the year and. therefore, storing barrels at the end of December.

The line fill has to run through there as well.

And line fill does run through there, that's correct.

The line fill -- it doesn't make a lot of sense to us, but we were told by a high authority in Washington, D.C. that will remain unnamed, that purchases of line fill go through the operating portion of our cash flow statement, even though it is a long-term asset. And I think that stems back from in 1999, 2000, when we sold a bunch of line fill, believe it or not, they wanted us to reclassify it there, too. So we had a big positive then, and so when we bill landfill, it's going to show a negative on operating cash flow. In reality, I think most layman would say that is a long term asset and shouldn't be there. And then, as Phil said, when we billed inventory, for contango purposes, even though we store it, it is a drag to cash flow when you build it. It is a huge surplus when it comes out.

Contango is kind of funky, the way it does it, because between operating activities and financing activities, when we borrow to pay the cash, you get different classifications of the cash flow.

We view that as just a working capital swing. And that's why we have a separate line of credit just to handle that, because it really is -- it is not permanent capital, by any stretch.

All right. That makes sense. Thanks a lot.

Thank you. At this time we show no further audio questions.

If those are the questions for today, we will just close by saying thanks to everybody who bore with us through this phone call and we look forward to reporting in the first quarter, sometime in April. Thank you.

Ladies and gentlemen, we thank you for your participation in today's teleconference. You may disconnect your lines at this time. And have a pleasant day.