Plains All American Pipeline LP (PAA) 2004 Q1 法說會逐字稿

Welcome to American Pipeline’s first quarter 2004 results conference call, during today’s call the participants will provide comments on the partnership’s outlook for the future as well review the results for the prior period. Accordingly in doing so they will use words such as believe, estimate, expect, anticipate, etc. 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 warning set forth in Plains All American Pipelines’ most recently filed 10K, 10Q, 8Ks and other filings with the Securities and Exchange Commission. In addition the partnership encourages you to visit Plains All American website at www.paalp.com, in particular the section entitled non-GAAP reconciliation. That presents certain non-GAAP financial that are commonly used, such as EBITDA and EBIT, and that may be used here today in the prepared or in the Q&A session, and also presents a reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures. This section also includes a table of selected 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 Pipelines. Also participating in the call are Harry Pefanis, Plains All American 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.

Thank you Jackie, and welcome to everybody this morning. Although we are still in the first half of the year, 2004 is shaping to be every bit as active and potentially as productive as 2003. We’ve already completed acquisitions for aggregate consideration of approximately $500 million, we have completed one small bolt-on acquisition and we remain on track to implement several attractive expansion and organic growth projects. In addition our core business performance was consistent with our business model which enabled the partnership generate excellent results in the first quarter.

Of equal importance to our growth activities and fundamental operating performance is the fact that not withstanding this high level of capital activity we have maintained a very solid investment grade quality capital structure, this was made possible because we pre-financed the equity portion of the Capline acquisition in December and we raised a significant amount of equity in connection with the Link acquisition. In addition to maintaining the strength of our balance sheet we also expanded our credit facilities to enable us to maintain a very high level of liquidity and financial flexibility. As we have repeated it often in the past, we are committed to maintaining a solid investment grade capital structure and healthy credit metrics as we grow our business.

During the course of today’s call, we’ll cover 5 primary topics. First we’ll discuss first quarter performance, second we’ll provide you with a status report on our expansion organic growth projects as well two recent acquisitions, third we will discuss our financial position, recent rating agencies activities and our financing plans and fourth we’ll provide you with updated guidance for the second quarter as well as an indication for the second half of the year and then fifth an finally we’ll address some recent developments and also our outlook for the future.

Let me start off by hitting the highlights of the first quarter. This morning we reported first quarter net income of $31m or 49 cents per unit. These results included selected items that impacted comparability between periods as has often been our case we highlight those items. This compares with our reported results for the first quarter of 2003 of $24.4m or 46 cents per unit. The current year results included a $4.2m charge associated with anticipated compensation expense accruals for our long term incentive compensation program and a $7.5m non cash mark to market gain associated with SFAS133. Last year’s first quarter results include a $900,000 non cash mark to market also associated with SFAS133.

I would point out that the $4.2m LTIP charge in the first quarter was meaningfully above the $1.9m level that we had included in our first quarter guidance. The vast majority of this variance relates to an incremental $3.1m accrual made as a result of our assessment as management. As of the end of the quarter March 31st that it was probable that there would be additional phantom unit grants invested in 2004 under the long term incentive plan and those that would vest really upon achievement of an annualized distribution rate of $2.30 per unit. And then the second item is that there’s simply a difference in unit price between the original LTF accruals in the third and fourth quarters of 2003 and the actual price that existed at vesting during the first quarter.

As we mentioned in previous conference calls, these types of probability assessments are made on a forward looking basis as of the end of each quarter are impossible to predict in advance, thus the performance aspect of this accrual was not included in prior guidance. Excluding these selected items impacting comparability, EBITDA for the first quarter 2004 totaled $50.4m which compares very favorably to the guidance range we provided on February 24, 2004 of $44m to $47m and represent a 16% increase over the first quarter of 2003. Reconciliation of these non GAAP financial measures and related amounts are included on our website at www.taalp.com and overall I’ll just say it was a very strong quarter.

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 web site shortly after completion of this call. With that brief introduction I’ll turn the call over to Harry Pefanis.

Thanks Greg. During my part of the call I’m going to provide a brief review for the performance drivers and the market conditions that affected the first quarter performance. I’ll also provide comments on the market conditions that currently influence our outlook for 2004. I’ll then provide an update on our organic growth project and acquisitions including performance from our recent acquisition of Capline assets. And lastly I’ll provide status report on the integration that is under way with respect to our recent acquisition of Links’ Crude Oil business and some idea about the likely impact of this activity on results for the next 6 months or so.

Our overall EBITDA performance for the first quarter excluding selected items impacting comparability exceeded the mid point of our guidance by approximately 11% and exceeded our comparative performance for the first quarter of 2003 by almost 16%.

This strong performance is primarily due to the following factors. First market conditions during the quarter were very favorable as there was strong backwardation in the quarter. And for the most part differentials were wider than typical historical levels. Secondly our transportation volumes on our Capline system were meaningfully above our forecast for the month of March. And then on a comparative quarter basis this year’s first quarter result accrued impact of acquisition made after the first quarter of 2003.

In our pipeline segment our volumes were about 20,000 barrels per day below the guidance that we’d provided for the first quarter. However, segment profit for segment G&A exceeded the mid point of our guidance range by about $3.1m. and that again excludes selected items impacting comparability. This is primarily due to the fact that the volume short falls were on low tariff pipelines while the volume on our newly acquired Capline system again like I said exceeded our guidance.

I would also point out that the Capline movements were to destinations with higher than forecasted tariffs. In addition, our diluent costs in Canada were lower than forecasted. Actual volumes on some of our major pipelines in the quarter include: 55,000 barrels per day on our All American Pipeline System, 275,000 barrels per day on our share of the Basin Pipeline System, 74,000 barrels per day on the Manito Pipeline System in Canada and 160,000 barrels per day for the month of March on our share of the Capline Pipeline System. The second quarter guidance Phil will walk you through in a few minutes incorporates projected volumes of 56,000 barrels per day on the All American system, 250,000 barrels per day on the Basin system, 71,000 barrels per day on the Manito system and 150,000 barrels per day on the Capline system.

In our Gathering, Marketing, Terminalling and Storage Segment, volumes were about 10,000 barrels per day below the guidance that we provided, with such variances being split about equally between crude oil and our LPG volumes. However, our segment profit before segment G&A exceeded the mid-point of our guidance range by about $2.3m, again, that’s excluding the impact of selected items impacting comparability. This was due, as I mentioned earlier, to the favorable market conditions and in the second quarter contribution from this segment to be more in line with what we would expect from a normal market.

We have several expansion and organic growth projects on which I will provide an update as well as a recent bolt-on acquisition.

In January, we announced the start of our Phase IV expansion of our Cushing Terminal, which involves the construction of approximately 1.1 million barrels of additional tankage. As mentioned in previous calls, 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 project is proceeding as planned and we currently estimate the project will be operational as scheduled in the third quarter of 2004. As we discussed on the Link acquisition conference call, we will also be actively monitoring the potential need to commence a Phase V expansion of our Cushing Terminal to ensure that we can maintain an appropriate level of counter-cyclical balance for our gathering and marketing activities.

In February of this year, we announced our plans to expand the throughput capacity of the 345-mile Colorado to Cushing segment of the Basin Pipeline System and to increase capacity to 400,000 barrels per day. This expansion was substantially completed in March and we are now planning to increase the capacity on the segment from Midland to Colorado City to 400,000 barrels per day. We expect the expansion to this system, of this segment will be completed during the second half of 2004. When completed, capacity on the entire system will be increased by approximately 15% to 25%, depending upon the segment. The total cost for the expansion of both segments will be approximately $3m.

Historically, the pipeline has sometimes operated at levels that were close to its previous maximum throughput and we are now positioned to handle increased volumes if market conditions warrant. Approximately $1.1 million of the capital for this project was included in our previous guidance.

This quarter, we also initiated a 29-mile pipeline construction project that will connect the Iatan system, which we acquired from Navajo in March 2003, to the Basin system at Colorado City. This project will cost approximately $6 million and will provide a direct connection of these volumes to the Basin system at Colorado City. This new connection will also complement our Basin expansion project as it will free-up capacity on the Midland to Colorado City segment of the line. We are nearing completion on this project and expect to activate the new line in May. Capital for this project was also included in our previous guidance. Earlier this month, we announced a pipeline construction and transportation agreement with Coffeyville Resources Refining & Marketing, LLC, which recently acquired Farmland’s refinery in Coffeyville, Kansas. Coffeyville Resources is an affiliate of Pegasus Capital Advisors. Pursuant to the agreement, PAA will construct and operate a 100-mile, 16-inch pipeline that will transport crude oil from Cushing, Oklahoma to Caney, Kansas. At Caney, the pipeline will now connect to an existing third-party pipeline that connects to the refinery in Coffeyville. The new pipeline is subject to a long-term agreement that provides that the point of origination for shipments on the line will be our Cushing Terminal. In addition, the agreement requires Coffeyville to meet minimum shipment requirements during the initial 5-year term of the contract. We expect this project to begin generating revenue during the first quarter of 2005. The expected cost for the project is approximately $33 million. This is an incremental project for 2004 and it was not included in our previous guidance.

Wrapping up our discussion of projects under way, I would also note that the post-closing capital programs associated with the ArkLaTex and Red River acquisitions are on schedule and should be completed by year-end as planned. Our previous guidance, which has not changed, included approximately $16 million of capital associated with these projects in 2004.

During the first quarter, we also made one small bolt-on acquisition. In March, we acquired the remaining interests in the Eugene Island Flowline System from various partners for a nominal amount. We acquired a partial interest in this system in connection with the purchase of South Louisiana assets from El Paso in mid-2003 and now own a 100% interest in the system. That Eugene Island System is a 57-mile offshore gathering pipeline located in the Eugene Island area of the Gulf of Mexico. In March, the system delivered approximately 19,000 barrels per day of offshore crude oil to our Burns Terminal.

Moving on, I would now like to spend a few minutes giving you an update of the performance of the Capline system. We closed the acquisition of a 22% interest in the Capline Pipeline System and a 76% interest in the Capwood pipeline system from Shell on March 1st. Due to the “plug and play” nature of the acquisition, these assets were substantially integrated into our systems contemporaneously with the closing.

As you may recall from our Capline conference call, the Capline interest that we have acquired has historically provided the swing transportation service on the system. Financial performance for Capline and Capwood for 2001 and 2002 was strong. Capline volumes averaged approximately 213,000 barrels per day in 2001 and 166,000 barrels per day in 2002. This represents capacity utilization of 86% and 67%, respectively. However, as industry dynamics continued to evolve, volumes in 2003 continued to decline and ranged from a high of approximately 247,000 barrels per day in May, which was close to full capacity, to a low of approximately 53,000 barrels per day in November, which was slightly over 20% of capacity. Effective December 1, 2003, the tariff structure was modified to combat declining volume shipments on this space, thus making it a more competitive alternative to Midwest refiners. As a result, we strongly believe that we acquired this asset at or near the bottom of its performance cycle.

During our December 16th conference call, we shared our forecast that the volumes on our Capline space would range between 110,000 and 125,000 barrels per day, with a mid-point of 117,500 barrels per day. In March, the first month under our ownership, volumes on our Capline space averaged approximately 160,000 barrels per day, or 36% above the mid-point of our guidance range. This strong performance has continued into April where volumes nominated on our space totaled approximately 211,000 barrels per day. Again, the April volumes are nominated volumes and we will not know the actual volumes shipped for April for a few more weeks. Currently, nominations for May are approximately 161,000 barrels per day.

As encouraging as the results have been so far, it is still far too early at this point to draw any conclusions regarding future shipments. Historically, Capline movements appear to have a seasonal trend, with lower volumes in the winter. This past year, volumes on the acquired capacity were 109,000, 81,000 and 125,000 barrels per day in December, January and February, respectively. Our guidance for the second quarter, which incorporates the expected higher levels for April and May, assumes average Capline volumes of 150,000 barrels per day. Our forecast for the second half of the year remains at our original forecasted level of 117,500 barrels per day.

Later in the call, Phil is going to be providing financial and operating guidance for the second quarter as well as the second half of this year. This guidance will include the expected contribution from our recent acquisition of Link’s crude oil business, which we completed the acquisition on April 1st.

We provided a significant amount of information during the Link acquisition conference call, so I don’t want to repeat a lot of that information here. Having said that, we have had control of the assets for approximately 27 days and I want to give you a status report on three aspects of the transaction.

The first issue to discuss relates to the integration. It is early in the process, but so far the integration is progressing smoothly. The transition team includes a complement of our employees as well as consultants that we have used on previous integration efforts. Having recently completed the integration of the ArkLaTex assets that were acquired from Link last year, we had a road map that we could use for the integration. We were also fortunate that we were able to start planning for the integration of these assets prior to closing.

The second issue deals with near-term activities with regard to one-time capital expenditures that we believe are necessary to bring the assets up to PAA’s operating standards and additional costs, both capital and expense, that we anticipate will be necessary to comply with existing regulatory requirements, primarily pipeline integrity management and API 653 guidelines. Altogether, these costs are estimated to be approximately $22 million, the majority of which are expected to be spent within the next twelve months.

These activities include, among other things, the smart pigging, hydrotesting, installing cathodic protection, leak detection and SCADA monitoring equipment, repair and upgrading of pipelines and the inspection, repair and upgrading of storage tanks. A lot of this work is required to meet the September 30, 2004 deadline associated with the pipeline integrity management program. Until we actually perform some activities, it is difficult to determine how much of these expenditures will be capital and how much will be expensed and flow through our statement of operations. However at this time, my best guess is that as much as $6 million may pass through the P&L over the next six to nine months and should be taken into account as you monitor our EBITDA run rate. We will attempt to capture and quantify most of these costs as we report our quarterly results for the next two or three quarters.

The third and final area that I want to briefly mention relates to potential expansion and organic growth projects in and around the Link asset base. Due to Link’s deteriorating financial condition, capital has not been available to fund these types of projects. Based on a cursory review of a handful of potential projects, we feel confident that the Link assets will provide us with additional organic growth opportunities, however, these are intermediate term projects and our initial focus will be to integrate the business.

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

Thanks, Harry. During my part of the call, I will review our capitalization and liquidity at the end of the first quarter and discuss our recent and anticipated financing activities related to the Link acquisition. In addition, I will walk through our financial guidance for the second quarter and full year 2004.

Our credit stats were extremely strong at the end of the first quarter. Our Long-Term Debt-to-Total Cap ratio at March 31, 2004 was approximately 48%. Excluding the LTIP accrual, our EBITDA-to-Interest coverage ratio for the quarter was over 5 times. In addition, based on the mid-point of our EBITDA guidance for 2004, excluding Link, our forward-looking Long-Term Debt-to-EBITDA ratio was around 3.5 to 1. Our liquidity position was also exceptionally strong, with aggregate available liquidity under our revolving credit facilities at March 31st of approximately $435m at the end of the quarter.

We closed the Link transaction on April 1, 2004. Funding requirements at closing totaled approximately $276m. Including the near-term costs that Harry discussed earlier as well as other obligations and commitments included in the purchase price and other costs that will be funded within the first year of the acquisition, we expect aggregate funding requirements will total approximately $328m.

We had more than sufficient availability under our existing revolving credit facilities to close this transaction. However, in order to ensure that we had ample liquidity and financial flexibility, we entered into a new $200m, 364-day senior unsecured revolving credit facility. At our option, the term of the facility may be extended for twelve months. The pricing terms of the facility mirror our existing 364-day facility.

On April 15, we completed the $100m private equity placement that we announced in connection with the Link acquisition. Proceeds from the private placement were used to reduce bank debt under our revolving credit facilities.

At March 31, 2004, pro forma for the $330m Link Acquisition and the approximately $100m private equity placement, PAA had long-term debt outstanding of approximately $917m, book equity of $840m and a debt-to-total capitalization of approximately 52%. Based on our projected EBITDA run rate and incorporating the mid-point of our expected synergies from the Link Acquisition as well as excluding selected items impacting comparability, our long-term debt-to-EBITDA ratio is 3.7 to 1 and our ratio of EBITDA to interest expense is over 5 to 1.

We have pledged to finance the funding requirements for the Link acquisition with 60% equity. We raised our targeted level of equity financing for this deal from our normal target level of 50% equity in order to maintain positive credit momentum and reinforce our commitment to achieve a mid- to high-BBB credit rating. With over half of our targeted equity funding in place, we believe we have significantly reduced the equity refinancing risk that would normally be associated with a transaction of this size. We intend to complete the equity-financing component of this transaction by accessing the public equity market over the next several months, once the SEC has concluded its review of our 2003 10-K. Although we were slightly above our targeted long-term debt to EBITDA ratio after we completed the $100m private placement, the completion of the remaining equity financing will return our credit statistics to well within our targeted credit profile.

Given the recent press releases and ratings actions by both the rating agencies, I want to spend just a few moments to clarify the nature of the SEC review. At one point or another, the SEC reviews all public companies. A routine SEC review typically involves the periodic examination of the subject company’s registration statement or annual report on Form 10-K for the purpose of reviewing the adequacy of the disclosure and compliance of the filings with SEC rules and regulations. It is our understanding that, as a result of Sarbanes-Oxley and other corporate governance initiatives over the last several years, the SEC intends to review the filings of Fortune 500 companies at least once every three years. We did rank 155th in the most recent Fortune 500 rankings and we have gone for several years without our filings being reviewed.

For these reasons, we believed that there was a high likelihood that we would be the subject of a routine review this year. Because of this, we felt that it was important for us to complete the private placement, as we did not want to make a large acquisition and then be precluded for an extended period of time from accessing the public equity market. We believe this type of foresight, planning and execution is important for us to achieve our ultimate ratings goals.

We filed an S-4 registration statement with the SEC on March 17, 2004, related to the 144a debt offering we completed in December of last year. Once declared effectively, the S-4 will enable us to exchange the unregistered notes that we sold in December 2003 for registered notes with the same terms and conditions. A couple of weeks after filing, we received notice from the SEC that they indeed intend to conduct a limited review of that document as well as our 10-K, which is incorporated by reference into the S-4 registration statement. We have received comments from the SEC and are in the process of responding to their comments. It would be inappropriate to discuss the specifics of the SEC’s comments until we have completed the review process, but we did want to confirm to you that we believe this to be a standard review.

Let me now shift to a discussion of the Partnership’s financial guidance for the second quarter and full year 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 estimated contributions from recent and pending acquisitions.

Before I walk through the numbers, I want to spend a few minutes talking about the methodology employed in forecasting the contribution from the Link assets.

On our March 31st conference call, we articulated our baseline forecast for Link’s current annual run rate EBITDA, which was approximately $25 million, or approximately $6.25 million per quarter. We also shared with you the range of our estimated annual cost savings and synergies of approximately $20 million to $30 million, which will be phased into our forward-looking annual run-rate over an 18-month period. Specifically, we projected that 50% to 60% of the savings will be incorporated into our forward-looking run rate within six months after closing, 75% within twelve months after closing and 100% within 18 months of closing. Partially offsetting these gains will be one-time items associated with integration costs as well as the regulatory and environmental costs and catch-up expenses that Harry discussed, just a moment ago. Over the next two to three quarters, these transitional items will have a negative effect on our financial results and partially mask the beneficial impact of the acquisition.

For purposes of the guidance I am about to provide, I will share with you our estimates of the costs we have included in our forecast that are associated with these transitional items. As we report actual results over the near-term, we will do our best to spike out these one-time items and their effect on our operating results.

For ease of comparability and to maintain focus on fundamental operating results, I will address the forecasted accounting charge associated with the potential vesting of LTIP grants separately at the end of this section.

In excluding any LTIP related charge, we would guide you to an EBITDA range of $51m to $56m, or a mid-point of $53.5m for the second quarter. This range is based on estimated segment profit before segment G&A of $77.3m to $80.8m. We estimate second quarter segment G&A should come in at approximately $24.8m to $26.3m.

This EBITDA range assumes that we will absorb an estimated $1.5 to $2m for Link transition-related items comprised of catch-up operating expenses, including the expense portion of API 653 and pipeline integrity management compliance activities. I need to emphasize, just as Harry did, that this is a somewhat loose estimate since we won’t know the split between capital and expense until we actually start performing some of these activities and there is also a fairly good chance that these activities will shift between the second quarter and the third quarter. We will monitor the actual expenses and provide comparisons when we review second quarter results.

For interest expense purposes, we anticipate average debt balances of approximately $900 million resulting in interest expense of $10.3m to $10.8m using a weighted average interest rate of approximately 4.7%, including our fixed-rate debt, revolver commitment fees and amortization of deferred amounts associated with terminated interest rate hedges. Finally, we estimate depreciation and amortization to be approximately $16.4m to $16.8m. Based on these estimates, we forecast net income of $22.6m to $28.5m or approximately $0.33 to $0.43 per unit.

In the 8-K that we filed this morning, we provided this second quarter guidance as well as an updated estimate for the second half of 2004 and the resulting guidance for the full year of 2004. Due to the nature of the Link acquisition and our integration activities, as I noted, it is not an exact science to predict the actual timing of the one-time charges and transitional expenses. Although we are highly confident in our ability to assess the aggregate expenditure requirements associated with the transition and integration, we would caution you that there is the potential for certain of these expenses to move around between quarters. That being said, we would currently guide you to an aggregate estimate of $6.0m for the last nine months of 2004 to address transition expenses such as catch-up operating expenses and the expense portion of API 653 and pipeline integrity management compliance activities. As previously noted, $1.5m to $2.0m of that amount is included in second quarter guidance.

Subject to all the caveats previously mentioned, we would currently guide you to an EBITDA range for 2004 of $216.4m to $228.4m, with a mid-point of $222.4m. This range is based on estimated segment profit before segment G&A of $310.1m to $318.6m. We estimate segment G&A should come in at approximately $83m to $86.5m. We expect interest expense will range between $44m and $45.5m and depreciation and amortization will range between $62.6m and $64.5m. Based on these estimates, we forecast net income of $106.3m to $121.7m, or approximately $1.54 to $1.78 per unit. I would point out that these forecasts assume we will access both the equity capital markets and the debt capital markets to refinance the balance of the Link acquisition debt.

Finally, consistent with past practice, we do not attempt to forecast any potential impact related to SFAS 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. For more detail on the second half projections as well as other assumptions, we would direct you to the 8-K we filed this morning.

As I mentioned before, the second quarter and full year 2004 guidance that I just covered excludes any charges related to our Long-Term Incentive Plan. Our first quarter results included an accrual for LTIP vesting based on a probability assessment that we will achieve the next performance threshold of $2.30 per unit. Our previous guidance had forecasted that the charge associated with this threshold would be recognized later during 2004. Accordingly, we have decreased the estimate for the remainder of 2004 and currently estimate that we will incur charges of approximately $900,000 during the second quarter and $200,000 during the second half of 2004 related to the LTIP plan. These charges are primarily related to specific service period costs related to the vesting.

I'll now turn the call over to Greg.

Thanks, Phil. One last item that I want to address before I summarize today’s call is the pending antitrust investigation by the Texas Attorney General and Federal Trade Commission into our acquisition of Link’s assets. Because we don’t want to do anything to compromise the investigation, there is only a limited extent to which we can comment. What I can do is reiterate the facts, as we know them. First, both PAA and Link completed all necessary filings required under the Hart-Scott-Rodino Act and the required 30-day waiting period expired on March 24, 2004, without any inquiry or request for additional information from the U.S. Department of Justice or the Federal Trade Commission. We closed the transaction on April 1st, more than one week later. The Attorney General and the FTC have asked us for some information and they are coordinating their efforts. We are providing them with requested information and working cooperatively and completely with both.

Second, Link’s first-purchaser activities in West Texas at the time of our acquisition were virtually non-existent. Finally, substantially all of PAA’s and Link’s pipeline and gathering systems located in West Texas are regulated, open access, common-carrier pipelines, which provide transportation services to third parties at published tariff rates on a non-discriminatory basis. In short, we believe the investigation will show that the transaction does not violate the antitrust laws.

Before we open the call up for questions, I’d like to take a few moments to update you on our progress towards our 2004 goals. We set four goals at the beginning of the year.

Our first goal for 2004 is to deliver operating and financial performance in line with our guidance. In that regard, we are off to a great start in this regard, with first quarter EBITDA and net income excluding selected items impacting comparability exceeding the mid-point of our guidance ranges by 11% and 21%, respectively. Although we expect some financial chatter in our operating results over the remainder of the year as a result of Link transition and integration matters, our strong first quarter results and our updated guidance provide additional support that we are on track to achieve strong operating and financial results for 2004.

Our second goal for the year is to improve our credit rating and preserve the strength of our balance sheet and credit profile. We are pursuing this objective by prudently financing our acquisitions and growth capital and raising the equity component of our financing in a timely manner, as we have historically done time and time again.

Specifically, we raised equity in advance of closing the Capline acquisition and, in conjunction with the Link acquisition, expanded our credit lines to preserve and increase liquidity and financial flexibility, raised $100m of equity in a private placement and committed to raise an additional $100m of equity as soon as practicable. We believe that by taking these steps we have demonstrated our commitment to achieving our objective. I would point out that even before raising the remaining equity, we still have a very strong capital structure and liquidity position that compares favorably to, and in many cases exceeds, that of the other companies in our peer group.

Our third goal is to increase our distribution to unitholders by approximately 5%, which would equate to an annualized distribution rate of approximately $2.36 by the February 2005 distribution. As a result of the strong fundamental performance of our core business together with the Capline and Link acquisitions, we have significantly improved the visibility of our future distribution growth. As a result, we are confident in our ability to achieve our targeted distribution growth for 2004 and are favorably positioned for additional growth in periods beyond 2004.

Our fourth and final goal for 2004 is to position the Partnership for continued growth by executing our organic expansion projects and pursuing our target of averaging $200m to $300m per year of accretive and strategic acquisitions. As Harry mentioned earlier, our previously announced organic expansion projects are on schedule and we have also added an important and attractive new project to our inventory with the Cushing-to-Caney pipeline project. On the acquisition front, we have already completed approximately $500m in acquisitions during the year and are still looking at other opportunities both in Canada and in the U.S. and will also look to make more bolt-on acquisitions that complement our asset base.

In conclusion, we are pleased with the progress that we have made so far this year and are optimistic about the future. We are aggressively tackling the biggest challenge that we have in front of us, which is to integrate the Link acquisition, and we look forward to updating you on our progress on next quarter’s conference call.

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

And Jackie, at this time, we will open the call up for questions.

Thank you the floor is now open for questions. If you have a question please press * 1 on your touch tone phone, if at any point your question is answered you may remove yourself from the queue by pressing the # key. We do ask that while you pose your question to pick up your handset to provide optimum sound quality.

Once again if you do have a question you may press * 1 on your touch tone telephone at this time, your first question is coming from Ralph Jean of Wachovia Securities please state your question.

Way to go guys’- first question is what was your distribution coverage ratio for the quarter? And with the increased equity to come where do you see that two or three quarters out?

I’m going to answer your question I’m going to first say we view it more on a run rate annual look forward basis than we do on a quarterly basis just because there’re things that could happen. Having said all that it was very strong for the first it was actually right around the 112% and I arrived at that number by taking our EBITDA excluding Adams and Packing comparability which was roughly (Indiscernible). Our interest expense which was 9.5 but there is a 400,000 amortization of an interest rate edged in there, so it’s actually back out at 9.1 and our maintenance capital was about 1.7 for the quarter. So that gives us a DCF of $39.5m and our all in loaded rate if you would for distribution including the GP share was about 35 too so that gives you about 112%.

On a look forward basis realizing that there’s some financial chatter in the numbers in the second quarter and throughout the year, we’re showing that at a 230 to 235 level actually 235 levels for the year 2004 we’re going to be at the mid-point of our guidance that we provided. We’re at a 103% to 106% depending on whether you include or exclude that financial chatter that Phil mentioned of around $6m.

Okay great so.

I think we’re in great shape and as I said earlier we’re building (Indiscernible) the year and so obviously 2005 we expect those numbers to be very strong as we enter the year and certainly as we exit 2005.

Okay great. One other question do you care to speculate on when you think the SEC review will be which would give us some indication when you’ll back to finish up the equity part?

I love it when people give me a binary question, the answer to that one is no easy out.

Okay.

Thank you your next question is coming from Yves Siegel of Wachovia Securities please state your question.

Hi good morning - I have two specific ones, the first is can you explain what the factors are that influence the variability on the Capline? Because it really fluctuates pretty significantly given your guidance, that’s the first one and the second is what are the factors specifically in terms of being able to determine what gets capitalized verses what gets expensed?

Yves that latter part of the question you’re talking with regard to

Link.

---with Link?

Yes.

Well part of it is we’ve had to make an estimate, we’ve got----there’s two really three activities that are going on as we speak. Number one is the pipeline integrity management program and they’re behind we would like for this to be given the fact that there’s a deadline in September 30 and so we’ve got a lot of capital we need to spend between now and September 30. So we’ve made a guess there’s some amount of inspections we have to do and we’ve estimated what the cost of that is, we’ve also tried to assume the amount of repairs to the extent that we’re replacing pipes within the line. We’re actually buying a Capital asset when we put that in there, so the capital part of it will be capitalized and the expense part just to determine the state of the line would be expensed and so we try to make estimates of what we think we’re going to find as we get forward. On API 653 it’s a different process but a similar concept, where again we’re testing tanks with respect to whether they meet certain standards, we have to take the tanks down and clean them, inspect them and then depend on what we find we either have to spend capital to improve them or we don’t.

And then on the third category is what we call Catch-up expenses and for anybody that’s ever bought assets from somebody that’s been wanting to sell and knew that they were going to sell in advanced, there’s a lot of expenses that just don’t get spent toward the end. We call them Catch-Up operating expenses and of course in some cases it can be some Capital items that you need to purchase. But you can assume that there’s not 30 or 40 days worth of supplies sitting on hand when we close that acquisition, so we got to replenish some normal recurring supply during that process.

Greg this is maybe semantics but in terms of the amounts that would get capitalized would that be characterized as maintenance then?

If we already owned it for years yes, if we were buying it we basically said we’re not willing to operate to pipeline or invest tank unless we can bring it up to our standards. And if it’s not I would tell you as part of the purchase price and that’s why when we gave all the details and we said this is kitchen sink, we said look the actual cash out of pocket is 270 we need to spend a bunch money that takes it up to 330 total purchase price. Then we’re going spend capital beyond that so that’s why I ran all my acquisition metrics against the $350m all in loaded number.

This is a fixer upper if you acquainted this to a real-estate asset bottom line is that we got a lot painting to do, a lot of yard mowing to do and we’ve got a lot of you know fixing up. The foundation is in great shape, wall structure is in great shape. But we’ve got some things to do that we want to do o live in this house for the years to come.

Got it.

Is on the Capline volumes – first of all consider that a small variance in Capline smaller volumes, you know 1.1 million barrels of pipeline, you know 5% variance. That variance we’re probably going to absorb a greater percentage of it because most of the other owners have refineries at the end of the pipeline so they are going to use their space and we’re the swing capacity.

So we bear just a proportionate share of the Capline total swing. And then secondly it seem to have a trend of having higher volumes during the driving season because lighter cruise will come up the Capline. And then in the winter when it’s not as much gasoline demand that market can take more crew from Canada so it does seem to have a seasonal trend to it as well.

I would say Yves when we gave our guidance – I think we had our conference call in December of 2003 when we made the announcement, you know we tried to average what we thought we would realized over a 12 months period. That’s what we came up – you know range of 110 to 125,000 barrels per day. It was great to start off at a much higher rate. What we’re trying to make sure people realized is that there may be months after where we are below the mid point. On average we feel very good about our numbers going forward.

The more assets that we can complement with our current ownership in South Louisiana and certainly will provide us with some additional assets in that area relative to perhaps package our services to refiners and therefore ensure that more barrels get moved on our space, you know may enable us to be more bold as we go forward about getting away from that 117, 500 per day. But for right now we just feel comfortable trying to make sure we get every body to kind of focus in on that, and that is the norm. If it turns out that we vary from the norm or routine basis for that entire year we’re going to obviously need to recalibrate to an upward number.

That’s great. Alright thank you very much.

Thank you your next question is coming from Ron Mundy of AG Edwards. Please state your question.

Thanks I have a couple of questions. Number one what’s the assumption on the units outstanding for the second quarter and maybe at the end of 2004?

As far as on the weighted average per second quarter Ron we use roughly 61 units. And so we’ve assumed effectively that we do not do an actual offering until we get into the second half. I think for purposes of the numbers that we’ve got in the guidance, Hal(ph) correct me if I’m wrong, but I think we basically assume that we did an equity offering early in the third quarter. And so we assumed that the numbers that I gave you earlier and including the unit coverage of that would (Indiscernible) finance earlier we used an average of about 65.3. And then if you look at our 10-K Ron you’ll also see that we assumed that we would re-finance our floating rate debt with long term fix rate debt in the number. So the guidance that we’re providing should be fully loaded on the capital structure for equity to be issued and for debt to be re-financed with higher cost debt.

Okay also – Cushing Five, when would you expect that to kick in from cash flow stand point?

At the risk of saying we need to kind of go back to the conference call script, we’re currently looking at that. And we’ll continue to monitor it. We need to see exactly what our utilization rate of our existing tanks and to some case utilization rate may not be that it’s got oil in it. But that we may need it to have oil in it in the event that market goes from backwardation to (indiscernible). And we’re not far enough into that yet to be able to forecast the Cushing - Cocany pipeline that’s coming on and all the activity.

And hopefully we’re going to see some volume recovery on the Link transactions - we’ll monitor that. And if it looks going in the right direction you’ll see us going in and out of phase 5 expansion because we’ll want to make sure we have those tanks available to provide the counter cyclical balance. So all we’ve done so far is say you know kind of a heads up. It’s not in our capital program right now, but it’s something we’re looking at. And we’ll be monitoring that price over the next 6 to 9 months if we make it at that end of that time period it wouldn’t show any cash flow increase until the end of probably ’05. If it’s earlier in that process and we make the decision to go ahead it could be you know in the middle of ’05. But it’s certainly no earlier than that.

Okay also you just alluded to Link-up have you had any early experience with recapturing Link customers?

Just because I can tell you about looking at the screen that we had that some of our competitors on that – we really rather not comment. I will say we’ve only had it 26 days so you know and again all of our numbers were predicated on not recapturing any incremental volume. So it wouldn’t be a disappointment the answer is no and I wouldn’t want to tip our hand by telling our competitors that we’re about to take volumes from them. But you know it’s still early in the process and you know hopefully this time next quarter when we get together we’ll have a little bit more to say about that if in fact there is anything happening.

Okay then thanks.

Thank you.

Once again if you do have a question you may press * 1 on your touch tone telephone at this time. Please hold while we poll for questions.

Your next question is a follow up coming from Yves Siegel of Wachovia Securities. Please state your question.

Thank you. The question relates -- what are you guys thinking in terms of the curve to ’0… (Indiscernible) and I know that your strategy basically is about wanting to keep balance between the 2 business segments, but I’m just curious on if you think that we’ll continue to see backward dated market and what other comments you’d like to add.

I think our expectation is that we’ll continue to see a backward market probably normal positive backwardation. You know just with all the events that happen – well there’s - inventory get taken out, you’re more susceptible to wide swings either way. Either reduction increase or production decline can make the volatility swing one way or the other but I think over all our expectation is we’ll have a normally backward dated market in 2005.

I mean, Yves, if you think about it for the information that we get about the economy recovering directly you’ve got you know stability if not growth and demand. And as long as OPEC is trying to show discipline you know we should see as Harry said a backward dated market. If either they over shoot demand because they just miss-estimated or if they choose to, for political reasons, raise production to lower prices you know that could change a little bit. But it other wise you know Harry is going to have to put on his secretary of state hat and try to figure out what politics are.

Well there might be an opening next year.

Let’s hope it’s the right party and please don’t ask me which one.

Alright thank you.

I’m showing no further questions at this time. I would like to turn the floor back to the presenter for any further closing comments.

Jackie thank you and thanks to every body for participating. Again we think it was a very strong quarter, we’re very pleased and we’re very optimistic about what the future holds for PAA and for our unit holders and our debt holders. Thank you very much.

Thank you this does conclude today’s teleconference. You may disconnect your line at this time and have a wonderful day.