Plains All American Pipeline LP (PAA) 2004 Q2 法說會逐字稿

Welcome to Plains All American Pipeline second quarter 2004 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 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 warnings set forth in Plains All American Pipeline's most recently filed 10-K, 10-Q, 8-K and other filings with the Securities and Exchange Commission. In addition, the Partnership encourages you to visit the Plains All American's website at www.paalp.com, in particular, the section entitled non-GAAP reconciliation that presents certain non-GAAP financial measures that are commonly used, such as EBITDA and EBIT, and that may be used here today in the prepared remarks, 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 includes table of selected items that impact comparability with the 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's President and COO and Phil Kramer, Plains All American's EVP and Chief Financial Officer. Now, I will turn the call over to Greg Armstrong.

Thank you and welcome to everyone this morning. Today the partnership reported excellent results for the second quarter. These results were primarily underpinned by a strong performance from our core business, solid contribution from our recently acquired interest in the Capline System and the accelerator realizations synergies from the Link acquisition. As a result, we exceeded the upper end of the guidance range that we provided on June 16th for EBITDA net income and net income per LP units.

Since our last phone call, we have also accessed the equity capital markets to position us for future acquisition growth and reinforce our commitment to maintaining a strong investment-grade balance sheet and credit profile. During the course of today's call we will cover 5 primary topics. First, we'll discuss second quarter performance. Second, we will provide you a status report on our expansion and organic growth projects, as well as recent acquisition activity. Third, we will discuss our capitalization liquidity and recent and anticipated financing activities. Fourth, we will provide you with an updated guidance for the third and fourth quarters of 2004 and what we will call very preliminary guidance for 2005. And then, fifth and finally, we will address our outlook for the future and provide some 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 comments for this call will be posted on our website shortly after completion of the call.

Let's begin by discussing the Highlights of the second quarter. This morning we reported second quarter net income of 35.7 million, or $0.54 cents per unit, which is up 52 percent and 29 percent respectively; as compared to second quarter 2003 net income of 23.4 million, or $0.42 cents per unit. These results include selected and items that impacted comparability between periods. The current year results included a $6.9 million non-cash mark-to-market loss associated SFAS 133. Last year, second quarter results included a 2 million -- excuse me $0.2 million non-cash mark-to-market gain, also associated with SFAS 133.

I would like to point out that over 60 percent of the fast 133 loss in the second quarter of 2004 relates to increased volatility on covered calls and that SFAS does not permit us to recognize the physical assets that offset these positions.

Excluding the selected items impacting comparability, adjusted EBITDA for the second quarter of 2004 totaled 68.6 million, which exceeds the updated guidance range we provided on June 16th, 2004 of 62 to $66 million and represents a 28 percent increase over the midpoint of our original guidance range for the quarter that we provided on April 28th of 2004.

In addition, also excluding the selected items impacting comparability, second quarter 2004 adjusted EBITDA exceeded second quarter 2003 adjusted EBITDA by 60 percent. Reconciliation for these non-GAAP financial measures and related amounts are included on our website at www.PAALP.com.

One last item before we move on to the next item on the agenda relates to cost incurred as part of the Link integration and transition. On our first conference call we promised to endeavor to provide you with a breakdown of onetime transition expenses that we incur as a result of the Link acquisition and integration effort. The primary costs that will fall under this category are catch-up pipeline integrity management and API 653 related costs.

As we mentioned on the call before, the timing of these items can vary between quarters. In the second quarter the amount spent in these areas on the Link assets that was expensed was not material. We currently estimate that approximately 2 to 3 million of our spending in these areas will be expensed during the remainder of 2004.

In short, the second quarter of 2004 was the strongest quarter in the Partnership's history and we believe it is a harbinger of good things yet to come. With that brief introduction, I will turn the call over to Harry.

Thanks Greg. During my part of the call I am going to provide a brief review of the performance drivers and the market conditions that affected second quarter performance. I will also provide comments on market conditions that currently influence our outlook for the remainder of 2004. I'll also provide updates on our organic growth projects, our acquisition activities and -- which includes the status report on the Link integration effort, and then lastly, I will briefly touched on a few organizational changes that were recently implemented. In the numbers that I discuss here will be excluding the effects of SFAS 133.

Our strong performance in the second quarter of 2004 versus second quarter 2003 is primarily attributable to the impact of acquisitions. Since June 1st of 2003 we completed a number of acquisitions that contributed to this year's quarter, including the Link route all business (ph), Capline, the Cal Ven pipeline, South Sas Pipeline, the ArkLaTex Pipeline, Alto Storage Facility, El Paso, South Louisiana assets and Iraan to Midland Pipeland System.

In our pipeline segment are guidance for the quarter was 1.67 million barrels per day, which is slightly ahead of the updated guidance of 1.64 million barrels per day. Our segment profit was $47.7 million. Actual volumes -- I'm talking about our major pipelines -- include 59,000 barrels a day on the All American Pipeline System. 271,000 barrels on our share of the Basin Pipeline System, 70,000 barrels a day on the Manito Pipeline System in Canada and 169,000 barrels per day on our share of the Capline Pipeline System.

The guidance Phil will walk you through in a few minutes incorporates lower volumes on the All American System and the Capline System. All other pipeline systems are forecasted to be in line with second quarter performance. Volume on the All American System is forecast to be 52,000 barrels per day for both the third and fourth quarters and volume on the Capline System is forecast to be 130,000 barrels a day in third quarter and about 117,500 barrels a day in the fourth quarter.

Operating expenses for both third and fourth quarters will be a couple of million dollars higher than they were in the second quarter, as we'll have an increased level of integrity management testing in the second half of this year.

In our gathering, marketing, terminaling and storage segment, volumes were approximately 662,000 barrels a day, which is in line with the updated guidance of 660,000 barrels a day that was provided in the second quarter. The markup acquisition was not as strong in the second quarter 2004 when compared to second quarter 2003 over -- and this excludes the Link business. Our segment profit per barrels is in line with last year's segment profit per barrel due to the counter-cyclical balance of our assets. The per barrel segment profit related to the Link business is quite a bit lower, as the gathering business primarily supported their pipeline assets.

The guidance for the third and fourth quarters that Phil will walk you through in a few minutes incorporates increased segment profit due to a little stronger margins, a little higher volume and then slightly higher costs. The margin increase is due to the volatility in the market, particularly in the third quarter. The volume increase is primarily due to the seasonal LPG volume and the cost reduction by primarily due to continued realizations of synergies from the Link transaction.

We have a couple of projects that are in progress. I'm going to provide a quick update on these. This first, is the phase expansion of our Cushing terminal that became operational in July, ahead of schedule. We still have some minor work to do to complete the tank, but we're able to put them in service in time to help us take advantage of a slightly tangled (ph) market in July. This was a $10 million expansion that increased are tank capacity in Cushing by 1.1 million barrels to approximately 6.3 million barrels.

The expansion from Midland to Colorado City segment of the Basin Pipeline System was completed in July. Capacity of the entire system is now up to 400,000 barrels a day, of which our share is approximately 348,000 barrels a day. This was a low-cost pipeline expansion that positioned us to handle increased volumes as market conditions warrant.

Also related to the Basin System, in May we completed the 29 mile pipeline construction project to connect the Iatan System, which we acquired from Navajo, the Basin System at Colorado City. This project provides a direct connection of crude oil volumes to the Basin System in Colorado City. The connection lowers our costs and complements our expansion project on Basin. This will free up capacity on the Midland-Colorado City segment of the line.

Lastly, in April we announced pipeline construction and transportation agreement with Coffeeville Resources, Refining and Marketing LLC and P.A. will construct and operate a 100 mile, 16 inch pipeline that will transfer crude oil from Cushing, Oklahoma to Cheney, (ph) Kansas. We're finalizing the rights of way and permits on this line and we expect actual construction to start near the first of September. We expect the project to begin generating revenue during the first quarter 2005. Now, I would like to provide an update on our 2004 acquisition activities.

We have completed three acquisitions this year, the Cal Ven Pipeline System from Unocal, the Capline System from Shell and the crude oil assets of Link Energy. The Cal Ven System is located in northern Alberta and delivers crude oil into the Rainbow Pipeline System. The Rainbow Pipeline System then transports crude oil South to the Edmonton market, which can be used in local refineries or shipped on connecting pipeline carriers. We have been pursuing this asset for several years and it fits very well with our other Canadian assets. The purchase price for the transaction was approximately $19 million -- U.S. dollars.

During the second quarter, we acquired the Capline Pipeline -- or actually, in the first quarter we acquired Capline and by the second quarter averaged 169,000 barrels a day, which is well above the midpoint projection we provided in December of 2003. In that midpoint, it was 117,500 barrels a day. It's still a little too early to get overly excited about this recent performance trend. Historically, Capline movements appear to have a seasonal trend with higher volumes in the summer and lower volumes in the winter, primarily due to the timing of refinery turnaround. In addition, our space of the capacity in Capline -- we expect to have some volatility in our utilization. However, based on nominations for July and August we expect volumes on our portion of the Capline System to average about 130,000 barrels a day from third quarter. At the present time we're assuming that volumes will return to our baseline levels for the fourth quarter, again averaging 117.5 thousand barrels day.

We closed the Link acquisition in the first day of the second quarter. Since then, we've been working diligently to integrate the link assets into our existing systems and processes. We held an interim update conference call on June 16th to discuss the status of the Link acquisition so I won't bore you by repeating all the details. But I'll briefly hit some of the highlights. The integration of the Link assets and businesses is proceeding smoothly and is ahead of schedule. We have now eliminated the lower end of the expected synergy range and we expect to relay approximately 27 to $32 million annual synergies as a result of the acquisition.

We believe we will reach approximately 70 percent of the targeted synergies during the third quarter 2004 and we will achieve the 100 set run rate sometime during the first quarter 2005. It will be impossible to separately track the Link business as we integrate it into our system, which is scheduled to be completed by the end of third quarter. However, we currently expect the Link acquisition to enable us to increase EBITDA by approximately 52 million to $57 million per year.

I will just make one last comment on the Link transaction before I move on. As you know, that acquisition is under an investigation by the Texas Attorney General's office. There's really nothing new to report on the front. We received a second request for information in June and responded to the request in early July.

The next item I would like to cover involves recent organizational changes.

Over the past several years, Plains All American has experienced tremendous growth in both scale and scope and today operates as one of the largest portfolios in the (indiscernible) crude oil assets in North America. As a result it's extremely important for us to selectively add management talent to help add value to this rapidly growing portfolio of assets and businesses. In early July, we announced the appointment of John Russell to the position of Vice President of Pipeline Operation and Jim Brad (ph) Vogel to the position of Vice President of Lease Operations. Together, these two individuals have almost 60 years of experience in the pipeline and crude oil business and are recognized throughout the industry for their expertise in these areas. We're extremely fortunate to add these talented individuals to our team and believe that they will be significant contributors to our future success. With that, let me turn the call over to Phil.

Thanks, Harry. During my part of the call, I'm going to review our capitalization of liquidity at the end of the quarter, discuss our recent anticipated financing activities. Additionally, I'm going to walk through our financial guidance for the third and fourth quarters of this year and then provide some very preliminary guidance for next year.

Our current status -- we're extremely strong at quarter end and as a result of financing activities subsequent to quarter end, they've become even stronger. On our Link acquisition conference call on March 31st we pledged to finance the Link transaction with 60 percent equity, which would equate to approximately 197 million of the 328 million of near-term funding requirements.

On April 15th, we closed the private placement of Class C common units with a group of institutional investors for net proceeds of $101 million, leaving approximately $96 million of recovered equity funding to meet our target. In mid-July, the SEC concluded its routine review of our S4 registration statement in the 2003 10-K, which was incorporated by reference into that registration statement. In response to the SEC's comments and suggestions, we filed a 10-KA on July 19th that contained enhancements to our previous disclosure in certain areas, eliminated several non-GAAP financial measures from MD&A and made minor caption changes to our financial statements. Also as a result of our discussions with the SEC, effective January 1st of this year, we adopted a new accounting principle with respect to our crude oil line fill-in third party assets and filed an 8-K on July 21st to disclose the impact of this change.

The impact on our first quarter 2004 results were very minimal totaling less than $50,000 and the cumulative impact of this change for years prior to 2004 was an aggregate charge of approximately $3.1 million. The cumulative impact was reflected in the first quarter's revised income statement as well, but in a separately captioned line item. Having completed the SEC review, we accessed the public equity market on July 22nd by selling 4.5 million common units at a public offering price of 33.25 per unit. Including the 4,004 units associated with the exercise of the underwriters over allotment option and the General Partners' proportionate capital contribution, we received net proceeds of approximately 159 million net of operating expenses.

Net proceeds from the offering we used to reduce debt outstanding and the Link acquisition credit facility. The additional equity above and beyond the $96 million required to meet our targeted equity funding would help fund expansion capital projects and position the partnership for future growth.

We believe our actions also reinforce the message that we are very committed to achieving a mid to high triple B credit rating. Our long-term debt to total capitalization ratio on June 30th this year was approximately 52 percent. Excluding the impact of SFAS 133, our EBITDA to interest coverage ratio for the quarter was almost 7 times. In addition, based on the midpoint of our EBITDA guidance for 2004, our forward-looking long-term debt to EBITDA ratio was around 3.81.

Pro forma the July equity offering at June 30th, PAA had long-term debt outstanding of approximately $776 million, book equity of approximately $1 billion and debt total cap ratio of approximately 43 percent. Based on the midpoint of our projected third quarter EBITDA annualized, our long-term debt to EBITDA ratio is approximately 3.1 to 1.

Based on the midpoint of our projected 2005 EBITDA range, and our projected average long-term debt balance for the fourth quarter, our forward-looking long-term debt to EBITDA ratio toward the end of this year is expected to be approximately 3.3 times.

Our liquidity position was also exceptionally strong with aggregate available liquidity under our revolving credit facilities in June 30th of approximately $343 million. Since the equity proceeds were used to pay down the acquisition Bridge Facility, our liquidity remained unchanged on a pro forma basis.

These metrics are well within our target credit profile and we believe are indicative of a solid investment-grade capital structure. We have now completed the equity financing component of the Link transaction and believe that it, plus the synergy realization associated with that transaction, are significant positive steps toward ratings improvement.

Last week, S&P removed us from Credit Watch with negative implications and affirmed their Triple B minus, stable rating and Moody's revised their review of us to from "review direction uncertain" to "review for possible upgrade." I would point out that we intend to refinance the remaining debt incurred to finance the Link acquisition as well as other debt outstanding under our credit facilities in the long-term debt capital markets.

Let me now shift to a discussion of the partnership's financial guidance for the third and fourth quarters of 2004.

Our guidance is based on the current state of 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 acquisitions.

We would guide you to an EBITDA range of 61 million to 64 million, or a midpoint of 62.5 million for the third quarter. The EBITDA range assumes that we will absorb an estimated 2 to $3 million from Link transaction -- transition related items comprised of catch-up operating expenses, including the expense portion of API 653 and Pipeline Integrity Management compliance activities.

Once again, and Greg kind of pointed out in the first part of this conference call, that this assessment is subject to change between quarters.

For interest expense purposes we anticipate average debt balances of approximately 825 million resulting in interest expense of 12.7 to 13 million using a weighted average interest rate of approximately 6.2 percent. That includes our fixed-rate debt, our revolver commitment fees, amortization of long-term debt premiums and discounts and deferred amounts associated with terminated interest rate hedges.

Included in the forecast of interest expense is the impact of issuing approximately $300 million of long-term fixed-rate debt and using the proceeds to reduce bank debt.

Finally, we estimate that depreciation and amortization will be approximately 16 million to 16.2 million and based on these estimates, we forecast net income of 31.8 to $35.3 million, that equates to approximately $0.44 cents to $0.49 cents per unit.

Moving on the fourth quarter, we would guide you to an EBITDA range of 62 million to 65 million or a midpoint of $63.5 million. I would point out that there is potential for a proportion of the 2 to 3 million of the Link transition related items that we're forecasting to be spent in the third quarter that will shift over into the fourth quarter.

For interest expense purposes we anticipate average debt balances approximately $890 million resulting in interest expense of 13.1 to 13.6 million using a weighted average interest rate of approximately 6 percent including fixed-rate debt, revolver commitment fees, amortization long-term debt premiums and discounts and then, finally, the deferred amounts associated with terminated interest rate hedges. We estimate depreciation and amortization for the fourth quarter to be approximately 16.1 to 16.3 million. Based on all of this, we would forecast net income to be 32.1 to $35.8 million and that equates to approximately $0.43 cents to $0.49 percent per unit.

I point out the foregoing results do not include our current estimate that we will incur charges of approximately $100,000 during each of the third and fourth quarters related to our LTIP plan. These charges are primarily related to specific service period costs relating to the vesting. They also don't include an expected $600,000 charge in the third quarter related to the loss on early extinguishment of debt.

Finally, consistent with past practice, we do not attempt to forecast any potential impact related to SFAS 133, again, as we have no way to control our forecast crude oil prices on the last day of each quarterly period. Accordingly, the guidance I've provided for the third and fourth quarters exclude any potential gains or losses associated with this accounting statement.

For more detail on these projections, as well as other assumptions, we direct you to the 8-K that we filed this morning. In that 8-K, we filed this morning, we provided the third and fourth quarter guidance as well as the resulting guidance for the full year of this year 2004. The third and fourth quarter guidance, when added to our actual results for the first half of the year, equates to an EBITDA range for this year of 242 million to 248 million with a midpoint of approximately 245 million and a net income range of 134.3 to 141.5 or approximately $1.96 to 2.07 per unit. These estimates exclude the impact of selected items impacting comparability that I mention a few moments ago.

Then finally, before I turn the call over to Greg, I want to give some very preliminary guidance for the next year, 2005, which is subject to all of the similar caveats we mentioned with respect to our 2004 guidance and really is even less precise, as it extends further into the future.

As it stands currently, we would expect EBITDA, next year, to range between 265 million and 275 million with a midpoint of $270 million. Based on our current outlook for the remainder of this year that equates to a 10 percent increase of our midpoint estimate for 2004 EBITDA. The other item that I would like to give guidance on for next year is interest expense.

We currently intend to increase our level of fixed-rate debt from approximately 60 percent to really as much as 90 percent. In a quarterly based on approximately 80 percent of the fixed-rate debt structure in the current quarter market for interest rates, we anticipate interest expense for next year will range between 54 and 58 million. Approximately 1.4 million of next year's projected interest expense is expected to be non-cash, as it relates to the amortization of the deferred amounts associated with terminated interest rate hedges.

Additional information on 2005 is also included in the guidance related 8-K that we filed earlier today. Again, I would caution that guidance is still very preliminary and we will provide more detail guidance as we complete our formal planning process towards the end of this year. With that, I will turned back call back over to Greg.

Thanks, Phil. I encourage everybody on the call to hang in there. We're getting close the finish line. Let me rap up today by briefly discussing several different, but somewhat related topics.

First, I will summarize the outcome of Plains' Resources, situation and its apparent invitations for Plains All American. Second, I want to spend a few minutes discussing our approach to making and financing acquisitions and then lastly, I'll just address the Partnerships' outlook for distribution growth.

On July 22nd, the shareholders of Plains Resources voted in favor of an all-cash acquisition of Plains Resources by (technical difficulty) which is owned 89 percent by Vulcan Capital, an affiliate of Paul Allen, and 11 percent is owned by Jim Flories and John Ramond, PLX (ph) Chairman and CEO respectively. That acquisition closed on July 23rd. Vulcan (ph) Energy is a privately held company and now indirectly owns the 44 percent interest in Plains All American's General Partner and also approximately 12.4 million Limited Partner units in PA that were previously owned by Plains Resources. Importantly, for PAA unit holders, Vulcan has advised us that as a result of tax optimization strategies employed in connection with the acquisition, they're targeted timeline for holding both the 44 percent General Partner interest in the 12.4 million limited partner units is a minimum of 10 year period.

Accordingly, we believe their objectives should put to rest any concerns about the potential overhang of units held by the PLX and now, indirectly, Vulcan Energy. Also, as a result of the acquisition, David Toppa Bianco (ph) of Vulcan has joined our Board as the Plains Resources Designated Representative. Because of David's relationship with Vulcan and their indirect holdings in the General Partnership -- General Partner interest and also in order to ensure continued compliance with NYSE rules regarding the independence and audit (ph) committee, we expanded the board size from 7 members to 8 members. Tap Simons (ph), who was previously designated as the Plains Resources Board Representative, will continue as a Director and fill the newly created Board position as an independent.

We welcome Vulcan as a significant owner in PAA and welcome David to the board and we look forward to working with him to continue to grow our Partnership.

From PAA's perspective we're pleased with what we believe to be a favorable resolution of the PLX situation. Throughout the entire process, the management and board of PAA have tried to do one thing and one thing only, that is, to look out for the best interests of Plains All American and its stakeholders.

We believe that the Vulcan transaction is a net positive event for the partnership. Vulcan has access to billions of dollars of capital, which they have shown a willingness to use to help Plains All American take advantage of attractive opportunities to grow the Partnership. This willingness was demonstrated in April when, along with Cane Anderson (ph) and Tortoise Capital (ph), they participated in our private equity placement to help fund the Link acquisition.

Thanks to long time supporters like Cane Anderson and Encap (ph), as well as many others, we have never had a problem raising the required equity capital to take advantage of attractive acquisition opportunities for the Partnership and also to keep our capital structure strong.

However, we believe that by adding the support of significant resources of Vulcan to that equation, it only strengthens our competitive position and we also think that it should make us that much more attractive to potential sellers of midstream assets, potentially for even larger transactions.

In addition to significant capital resources, we believe that Plains All American's organization brings extensive and distinctive skills to any potential acquisition transaction. We have developed and refined our acquisition, evaluation, negotiation and integration skills -- very importantly -- integration skills -- since creating this business platform in the early 1990s.

Perhaps the milestone event that accelerated our growth profile was the separation of our management team from Plains Resources in June of 2001. Since that time, we have made 21 acquisitions for a total of $1.1 billion. In addition, over that 3 year period we have made expansion capital expenditures and investments in Creal (ph) Landfill of approximately $200 million, a significant portion of which was stimulated by the acquisitions.

Notwithstanding, the significant amount of capital investment we have strictly adhered to our commitment to timely fund major acquisitions and expansion capital expenditures with no less than 50 percent equity. Since June of 2001 we've raised approximately $800 million in gross equity proceeds, which equates to approximately 74 percent of total acquisition funding and approximately 60 percent of aggregate, acquisition and expansion capital expenditure funding.

Despite spending slightly over $1.3 billion on acquisition and expansion capital projects in crude oil linefill doing that time period, our long-term debt in total capitalization ratio was approximately 50 percent or less in 10 out of the success of 12 full quarters with a maximum ratio of 60 percent on one occasion.

Moreover, if you include equity rates within 60 days after the end of each of those two quarters that we did exceed 50 percent, we would never have exceeded the 50 percent threshold, which, again, means we timely go to market.

We believe that these relative comparisons and the timeliness of our actions during a period of rapid growth demonstrate both our willingness and ability to access the equity markets, even during periods of market volatility. We're steadfastly committed to maintaining a strong investment grade quality capital structure.

As Phil noted earlier, we currently have what we believe to be one of the strongest balance sheets in the large midcap MLP sector. Pro forma for our recent equity offering at June 30th PAA had a total -- a debt to total capitalization ratio of approximately 43 percent and based on our midpoint of our 2005 EBITDA range and our projected average long-term debt balance for the fourth quarter, our forward-looking debt to EBITDA ratio towards the end of this year is expected to be a approximately 3.3 times, which is well within our targeted metric of 3.5 to 1 or less.

We believe our credit metrics compare very favorably to the entire large cap MLP universe and in many, many cases are superior to MLPs that have higher credit agency ratings than PAA, which is a situation that we are committed to remedying as we continue our quest to achieve a mid to high Triple B rating.

This discipline that we have in acquisition and financing effort is not only related to -- restricted to the financing activities, but also extends to our approach towards making acquisition.

Over the past several years, and starting here recently, sentiments regarding acquisitions, including valuation and the appropriateness of availability have had ebbed and flowed among both MLPs and the financial community. For Plains All American it's been relatively constant, because there are three key elements of a successful acquisition that we view. Number one, is it must fit within the context of our long-term business strategy. Number two, it must be accretive to our unit holders and number three, it must be able to be integrated in such a way as to not meaningfully detract from our existing operations since our goal here is to always make sure we have continuity in our distribution.

For us, delivering the accretion to our unit holders is a function of three primary factors. First, we must analyze the fundamental business and buy it right by identifying and incorporating known and potential value destroyers, such as environmental problems, litigation and expenditures needed to not only comply with regulatory requirements, but to adhere to PAA's high standards of operations and safety and those are just to name a few.

All the cost including future capital requirements are taken into account to determine the overall attractiveness of a project and our proposed purchase price. Second, we must timely realize the synergies that we have identified and lastly, we must maintain an appropriately weighted average cost of capital and solidly execute on our long-term financing plans.

By following these tenants, PAA has achieved its targeted acquisition objectives for all acquisitions made since 2001. Due to unforeseen industry and economic costs, not all of these accomplishments are evident by simply comparing the partnership's pre-acquisition cash flows with its post-acquisition cash flows. That's because of the introduction of previously unforecasted call, such as the direct and indirect cost of Sarbanes-Oxley, pipeline integrity management and API 653 and rapidly escalating health care costs.

All of those have negatively impacted the cash flow of PAA as well as many other companies in the industry. However, for PAA, notably, we've been able to absorb these costs and still generate very attractive returns on capital and deliver improved operating and financial results on both an absolute and per unit basis.

In addition we have lowered our incremental cost of long-term borrowing, while at the same long time positioning our capital structure for the future by maintaining high levels of liquidity and financial flexibility. As a result, we been able to successfully grow our Partnership and increase range distributions to unit holders, while simultaneously setting the stage for continued growth in the future.

In that regard, before I open the call up to questions I just wanted to recap the outlook for the future. The preliminary 2005 guidance that Phil reviewed is based solely on our current asset base and planned capital expansion projects and does not include the impact of potential future acquisitions.

On that basis alone, we look for 2005 to be another record year, both on an absolute and per unit basis. In addition, we will remain very disciplined in our approach to acquisitions, but we intend to, once again, target 200 to $300 million of potential acquisitions in 2005 and let there be no mistakes, we're also not sitting on our hands here in 2004. There is still a little bit of a year left here.

As a result of strong fundamental performance of our core business and our current expectation with respect to the level and timing of contributions to be derived from the acquisition of Link assets, we believe we have significantly improved the visibility of our future distribution growth, both in the near and intermediate-term and in that regard, I want to reiterate that our outlook for future distribution growth that we discussed in our June update call.

We currently expect our annualized distribution rate as of February 2005 to range between 236 per unit and 241 per unit, which represents a range of distribution growth of 5 to 7 percent over the February 2004 distribution level. As a result, excuse me, as the first step to achieving that goal on July 21st we declared our August 2004 distribution for the second quarter of 57.75 cents per unit, which equates to $2.31 per unit on annualized basis. That increase represents an increase of 2.7 percent over the May 2004 distribution and an increase of 5 percent over the August 2003 distribution.

We also believe we had good visibility for continued distribution growth throughout 2005. Based on our current slate of projects in our current outlook for 2005 we would expect our February 2006 distribution to be a approximately 5 percent to 7 percent higher than the February 2005 distribution and depending upon the timing and success of any future acquisitions, that distribution outlook could be enhanced or the momentum extended in the future periods.

That raps up the items on our agenda. We would like to thank you all for participating in today's call. For those that joined us late, a complete written transcript of prepared comments for this call will be posted on our website at www.PAALP.com very shortly. Also, joining us for question-and-answer today is Al Swanson, who is our Vice President and Treasurer. And operator at this time we are now ready for questions.

(Operator Instructions). Yves Siegel, Wachovia Securities.

Just a few quick ones if I could. Number one, Greg, do you have any estimate of the cost of the various items that you mentioned -- Sarbanes-Oxley, pipeline integrity, how much those items combined might have subtracted from EBITDA? That's number one. Number two, in terms of the distribution growth what -- if you could just frame that in terms of what kind of cushion or distribution coverage ratio you're looking at? And then thirdly and lastly, could you talk about the volumes that you have been able to return to the Link System and maybe just give a flavor of what you're seeing going forward? Thanks.

Yves, on the cost of the various Sarbanes-Oxley, pipeline integrity, management etc., it's probably on a cumulative basis, somewhere between 7 and $10 million on an annual basis. Pipeline integrity management -- I think, the API 653, which is relatively new in terms of the last 4 or 5 years, was not in our previous forecast 5 years ago and is today and we've probably spend on average here, I'd say around 2 million there. In terms of pipeline integrity management, embedded into our operating costs now to maintain and finish some of the programs, that runs an additional, probably 2 to 3 million. And then the Sarbanes-Oxley and all the extra bean counters that we have running around here to help us keep things nailed down is probably additional corporate governance costs, that's probably in the 4 to 5 million range.

You know for instance, the audit of internal controls that will have to occur alone is probably going to be equal to 50 percent to 100 percent of annual audit costs and that's not an inconsequential number.

So what we were trying to get across -- and I apologize for what sounded like we get on a soap box to kind of talk about a thematic issue, but we do listen to what our investors and analysts question about it -- what we here is that if you make an acquisition, does it add to your prior EBITDA? If it doesn't, does that mean the acquisition didn't perform? In many cases, the acquisition performs or outperforms, but what happens is the unknowns, the things that eat you up like health care costs come into play and so you have to absorb those.

What we're real proud of is that no matter how you look at our numbers, we deliver even having not seen this stuff coming. So what our game plan is to never surprise you and to make sure that we always have those costs dialed into our forecast. We may get surprised from time to time, but when it does, let's do it together, not because we knew and you didn't.

Hey Greg, can I just interrupt (multiple speakers) on that last point? In terms of going forward, does Sarbanes-Oxley compliance hinder the ability to make acquisitions at all?

Yves, that's a real good question. We spent a heck of a lot of time on the Link acquisition making sure, both at the management level and our Board's doing their job making sure at the Board level that they were comfortable that we could absorb something that, by far and away, is the most complicated integration that we've undertaken and do it timely to make sure that we could sign and check all the boxes on the internal control issue. And so that we could feel comfortable we could certify at year-end -- or assert at year end and the outside accounts could certify. And so it certainly added an extra layer of review and discussion and that is now built into our system.

I would say this -- that if we had tried to undertake that in the fourth quarter, so that we didn't have 6 months to make it happen, we would have either, probably, had to push closing till after the end of the year or pass because we would've been in a situation where we would have been caught midstream.

We would not have had enough time to go into their systems and verify their internal controls were working and also get ours done timely. So, it has the potential to impact. I think for PAA, because we spent so much time and again I go back to why did we get on the soap box here today, is we did 11 acquisitions or 10 acquisitions last year. We've done 21 acquisitions last several years. We've honed our acquisition integration skills and we've adapted to these and we've absorbed the costs.

So I think we're not perfect, but on a scale of 1 to 10 we think we rank higher than most peers with respect to our ability to identify, valuate and absorb. And so to the extent it's going to affect anybody in that sector to keep them from doing it, it's going to affect us, we think, less than others.

Let me just real quick, on the coverage ratio, we clearly have given ranges as opposed to specific numbers. What we have in affect built-in in the past and will continue to build in the future is the presumption that we want to maintain, on a steady-state basis, at least 101 to 103 percent coverage ratio. You know, if you look at the second quarter relative to our distribution level, it's running north of 120 percent and when you extrapolate the numbers that we have now provided guidance -- not only for '04 but also throughout '05 and we wanted to make sure we gave you the increased interest expense numbers, because clearly, if we intend to go to capital markets that's going to erode what you might have come up with -- a discretionary cash flow, if you assume LIBOR continues to be at 1 percent.

We don't think that's the case and that's why we're going to have a biased to increase our fixed-rate. But, we think we can hit the 5 to 7 percent growth for '04 and 5 to 7 percent growth for '05, so that we end up in early 2006 having achieved those objectives within that range and still be able to cover at least 102 to 103 percent coverage ratio in a stable state basis and feel comfortable that that's adequate.

Does that cover it?

I'm sorry, Greg, yes, the last one was just on Link in terms of the volume gains and what you're anticipating going forward?

You're probably tired of hearing me talk. I will let Harry talk.

Yes, this is Harry. On the volume gains, we have -- basically our game plan has been first and foremost is to integrate Link activities into our businesses and our systems and to maintain their existing business and understand their margins and their drivers. Really looking at recapturing volumes or seeing what volumes make sense at to the Link assets that we're in the area of assets -- that's probably a 2005 target for us. We want to make sure we get this thing up and running and running right.

As you can imagine, if Harry and I start asking our guys how are we doing on recapturing volumes and they take their eye off the ball of simply doing what we've laid out in our business plan, it jeopardizes success, because if all we do -- let's say we never recapture one barrel, but we do what we thought we could do on this thing -- we basically paid roughly 330, 350 million for something that can generate 55 million plus or minus 3 million of EBITDA -- that is success. So I don't want to jeopardize that. In June of next year, if we're not volunteering information on volume recovery than you ought to be asking that question. But I really don't want to take our guys' eyes off what is clearly success by just executing, again, what we think it's a very well-defined integration plan.

Okay, thanks a lot for the answers.

Brian Barigy (ph), Allstate Investments.

You mentioned you were ahead of schedule on the Cushing terminals, the CapEx associated with that. How was the CapEx tracking versus your expectation and if you could reiterate your full year CapEx -- both maintenance and growth expectations, that will be great.

Sure, you want to talk about it, Greg?

As far as the expansion -- Brian is your question was the expansion of Cushing on budget and on-time?

Exactly.

Yes. Actually it was forecasted to be in service in September -- late September and we were able to accelerate the construction of the terminal. It is not totally 100 percent done, but it's done enough that we can move oil into it and move oil out. We've got some painting and some clean up to do. It was right on budget and ahead of time. You want to help us here on capital expenditures for the year?

As we disclosed in the 8-K we have roughly 100 million budgeted for the second half of the year. That would put the total for the whole year at approximately $130 million. Embedded in that, there are certain very larger projects that we disclosed individually, being the Cushing Caney Pipeline -- services, projects associated with specific acquisitions. There are a lot of smaller projects that we have not specifically disclosed or broken out that comprises the balance.

That's perfect, thanks.

(Operator Instructions).

Did we scare everybody off?

David Maccarrone, Goldman Sachs.

Greg, in answering Yves' previous question on coverage ratios, and in taking a look at your preliminary guidance, I wanted to get a sense for how you're going to approach raising the distribution looking out over the next year or so if results continuing to exceed expectations, because the guidance seems to imply a much more substantial increase in the distribution in 2005 than is implied by your 5 or 6 percent target, particularly looking specifically at February. I mean, can we see a 10 percent type distribution increase in '05? Is that a realistic expectation? Can it be better than that? Or might you elect to take a more conservative approach on distribution coverage?

Our goal in these are going to sound like contradictions and they are not. They are goals. Our goal is to always under promise and over perform. If I've got you smiling every time we report than we've done at least as good as we've said or better. That's success.

The second thing I would tell you is anytime we put a number out there as management we believe our goal is to try and do much better than that, even if Mother Nature or the business deals us a curveball. I would say, it when you say there is substantial growth -- I mean, if you look at the numbers, and we, let's say, we've hit the top range of our growth at 5 to 7 percent -- because part of it's an issue of compounding. If we only grow at 5 percent this year, can we do 10 percent next year? You would almost expect that. If we do 7 percent this year would you expect us to do the full 7? It's certainly possible but the compounding -- I don't have my calculator right here in front of me to work. But it does have an impact on sequential growth as to whether you start at the low-end or the midrange or the high end of the range.

I would say this. If you are doing the math and saying these guys appear to have more distribution growth potential than what they're talking about, there's probably some truth in that.

Part of our job as management is to make sure that not only can we forecast it but we can deliver it and sustain it and, as our comfort level rises, if we're in the first quarter of this year and we achieved everything that we think that we can do and we said we can do, is the potential for our distribution to be a little bit north of what we've guided you to certainly.

That same statement would carry with us throughout the year and of course, in any year that we have been together as a management team was over 20 years, we've never failed to do something beyond what we forecasted beginning of the year. So our goal is to continue that trend. So hopefully we will make other things happen.

One of the issues that we have to look at it if we end up with an organic growth project that has us a 6 or 9 month lead-time on that where we need to; and we don't want to the equity capital markets to fund it, we can fund it with cash flow growth so that we minimize the negative carry, but that would accelerate the potential distribution growth on the tail end of it. So we don't want to give up our ability to use all of our resources to fund our capital programs, which includes cash flow. The good news for the unit holder is if we do that they're going to note that it only accelerates the potential growth in the visibility of that in the future.

Okay, thank you.

David Fleisher (ph), Cane Anderson (ph).

Greg, I didn't want to let you off the hook too easily here (laughter). Let me ask you a couple of broader questions. First, you've spoken in the past about having organic growth opportunities that you have conservatively talked to in the very small single digits -- you save sometimes 1 to 3 percent organic growth in the past. As you are looking at your assets now, with this Capline and Link acquisitions, with some investment opportunities, it seems to have grown in internal investment opportunities -- I'm just wondering, with current operations how you would characterize your organic and investment growth opportunities as opposed to the acquisition growth opportunities. Would you still say it's in that 1 to 3 percent range or top end of that range or what?

David, part of it's going to be a function of what else we're doing and part of the organic growth is a fallout out of the acquisitions that we create even to the extent, for instance, the acquisitions we made last year, which were 10 smallest ones that, cumulatively, totaled about 160 million in 2003, but it was enough, cumulatively, to stimulate the growth of Cushing to build another million barrels. So one kind of feeds the other one.

What I feel comfortable saying is that if we knew today we were not going to have any acquisition growth for the next 2 or 3 years, we would be able to redirect our resources internally to achieve what we think would still be very respectable organic growth and that growth may actually exceed the 1 to 3 percent, because, again, you're taking people, resources, and other capital in focusing them on optimizing what we put together. To the extent that we're going to use those same resources to chase acquisitions that have opportunities that we don't currently control, we would rather put them in that direction. So I would probably still guide you to a 1 to 3 percent organic growth, because we're going to continue to make acquisitions.

But I don't think we're limited to 1 to 3 percent if we didn't have acquisition growth opportunities, because there's so much more that we would focus our resources on. And we've had discussions within the management team and at the Board level -- well, if that's true why don't you just add more people? What we have found is that having the right people doing what you're confident in knowing they can deliver is the most important thing and we are growing the team as you saw -- as you heard Harry mentioned earlier -- but you can't just go out there and add 20 bodies and be a great acquisition Company and a great organic growth. It comes with time and I think we're pushing the northern end of the range, as you mentioned in terms of our potential and that's what is our game plan is to deliver and over deliver, really.

Okay and then the second thought process that I would like to pursue that you touched on a couple ways already is the current acquisition marketplace where we have seen very recently a couple of refined product assets go at some fairly fancy prices and I'm wondering -- given the different nature of your assets versus some of the other pipeline MLPs, midstream MLPs, out there, what you see out there and what your confidence level is in being able to continue to identify assets that will be accretive and for you and you'll be able to continue to complete --?

I would start by saying that we still feel comfortable stating the target of 200 or $300 million a year of acquisitions and we strive for years -- like we're experiencing as we speak right now, we've already done 500 million this year. That is to say, we want to overachieve against that if the opportunities are there.

Plus, just like last year, we were very content only to do 160 million of acquisitions, because we didn't see, in the bigger transactions, the kind of values that we needed. As we lookout on the horizon for the next 2 or 3 years, we see good deal flow for things we think we have competitive advantages that enable us to be competitive in the bid process, or hopefully, in the negotiating process if possible, but then to turn around and make those more attractive to our unit holders than perhaps the same asset in somebody else's hands would be, because of synergies.

I want to be quick to point out that I'd don't ever throw rocks at what other people pay for assets. I mean, if you look solely at Link, based upon what their cash flow was before we bought it -- it was roughly 25 million a year and 350 -- I mean hell, we paid a 14 multiple for that. The key is what do you do with it afterwards. And we are probably one of the more aggressive Companies at telling people in advance what we're going to do and how we're going to do it. It's because we're the Rodney Dangerfield, we're always trying to gain respect -- we need to be outperforming the others to get it.

Confidence level in that there's going to be opportunities -- absolutely -- confidence level that we have synergies in unique capabilities that enable us to be competitive for those acquisitions -- absolutely. So we will continue to be disciplined and with that kind of reverting back to the other question that you had, we're very content not to make acquisitions if that's -- if we can't get them right, because they will get right over time. Just because somebody else may overpay for an asset doesn't make it a bad assets; makes it a bad investment. But the market has a way of marking those opportunities to market over time and they get another shot at them. Case in point, we chased the Link assets for 8 years. Now, you can either say we're slow or deliberate or we're persistent, but it's somewhere in that category.

Okay, thank you.

Arthur Hall of Valerian Associates.

Great quarter. Greg, you've talked a lot in the past about the impact of the shape of the forward curve on your various businesses. I wonder if you could talk a little about the absolute level of prices as they move, perhaps, up to 50 or higher? How does that affect your current businesses and the acquisition market?

Sure. Harry, you want to jump in on that?

Sure. You know, typically the price of crude doesn't have much of an impact on our business. Obviously, higher oil prices are good because it induces more drilling activity and boosts our assets in big producing basins so that's beneficial. The one area where there is a direct benefit is in our pipeline operations. We have a pipeline loss allowance and the higher oil prices help the loss allowance. The offset to it is that typically there's going to be higher energy costs. So higher oil prices are probably slightly beneficial to us from that perspective. On the acquisitions, about the only impact is if we are acquiring the linefill and a pipeline, in addition to the pipeline, it will increase the cost of the linefill, but we factor that into our total valuation of the assets. So I don't see it as being negative to our ability to make acquisitions, either.

I would say -- if you're asking us for a price forecast, we would be one of many voices screaming into the hurricane right now. There are a lot of opinions out there. But I think the one thing we feel competent saying is we see increased levels of volatility that we're currently experiencing staying here for quite some time and we spent the last 12 years building this entire enterprise to be in a position to, not only insulate ourselves against the downsides of either a cyclical or multiple market, but the benefits. So, you know, could we see oil at $55 a barrel? You bet. Will it stay there for very long? We don't think so, because if you put oil at 55 today, you will affect demand. And can we see it if it does to 55 go down in the low 30s? Absolutely. Could it into the 20s? I think so.

The neat thing about our asset base right now and our disciplined approach is we stand to benefit from either end of that range and the more often that it goes from one extreme to the other, the more often we're likely to benefit. I don't think it affects our acquisition -- it doesn't certainly, hinder, we don't see our acquisition ability -- and if anything, I can argue that, because we have more synergies and because we have a longer-term view than some people that might have access to shorter term capital, it may well improve our competitive position.

(multiple speakers) Thanks.

Every time we go to a data room, we worry about that next guy, though, having some grandiose view of the future and no synergy, so we hold our breath. We want to make sure we walk out of there with something we can generate an attractive return on capital at.

Thanks.

Brian Watson, RBC Capital Markets.

I just had a quick housekeeping question. What was the net income allocations at JP (ph) for the quarter?

Hang on, just a second.

Let's see here.

About 2.5 (inaudible)?

(multiple speakers) just a second, Brian.

Okay.

It's 3.1 million.

Okay, thanks.

I'm showing no further questions at this time. I would like to turn the floor back over to Greg Armstrong for any further or closing comments.

I probably talked ourselves out on this end. Thank you all very much for attending. We appreciate the continued support and we will hopefully update you with great news again at the end of third quarter. Thank you.

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