Plains All American Pipeline LP (PAA) 2004 Q3 法說會逐字稿

Welcome to Plains All American Pipeline's third 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," et cetera. The law provides Safe Harbor protection to encourage companies to provide forward-looking information. The partnership intends to avail itself of those Safe Harbor provisions and directs you to the risks and warnings set forth in Plains All American Pipeline's most recently filed 10-K A, 10-Q, 8-K and other filings with the Securities and Exchange Commission. In addition, the partnership encourages you to visit Plains All American's website at www.paalp.com.

In particular, the section entitled non-GAAP reconciliation 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 question-and-answer session nd 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 Pipeline, also participating in the call are Harry Pefanis, Plains All American's President and COO, and Phil Kramer, Plains All American's EVP and Chief Financial Officer. I will now turn the call over to Mr. Greg Armstrong.

Thank you, Jackie, and welcome to everyone on this post-election day here in the US. This morning the partnership reported excellent results for the third quarter. These results were very much in line with the updated guidance that we provided on September 23rd for EBITDA, net income and net income per limited partner unit. Relative to the original guidance, these strong results were driven by a combination of several factors, including continued acceleration of acquisition-related synergies and our ability to capture increased margins from continued crude oil market volatility and our gathering marketing terminal storage segment. Additionally we experienced higher than expected pipeline segment profit due to volume mix and higher realized prices on our pipeline loss allowance.

Finally our reported results were also influenced to some extent by continued expansion in our LPG business and the strengthening of the Canadian dollar during the third quarter. Harry will touch on several of these factors as he describes the quarter's performance and sets the stage for fourth quarter guidance that Phil will cover later in today's call.

During the course of today's call we will cover five primary topics. First, we'll discuss third quarter performance; second, we'll provide you with a status report on our expansion in our organic growth projects, as well as recent acquisition activity; third, we'll discuss our capitalization, liquidity and recently completed financing activities; fourth, we'll provide you with updated guidance for the fourth quarter of 2004 as well as review our preliminary guidance for the full year 2005; and then fifth and finally, we'll provide you with 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 prepared comments for this call will be posted on our website shortly after completion of this call. Let's begin by discussing the highlights of the third quarter.

This morning we reported third quarter net income of 41.7 million, or $0.59 per unit as compared to third quarter 2003 net income of 11.9 million, or $0.20 per unit. These results include selected items that impact comparability between periods. The current year results include a $2.9 million gain from foreign currency revaluation attributable to the strength in Canadian dollar, a $900,000 non-cash mark-to-market gain associated with SFAS-133 and $100,000 of other losses on a net basis.

Last year's third quarter results included a total of 10.5 million of such items consisting of a $2.9 million non-cash mark-to-market loss associated with FAS 133, a 7.4 million LTIP charge, long-term incentive plan, and $200,000 of net other losses. Excluding the selected items impacting comparability, adjusted EBITDA for the third quarter of 2004 totaled 67.6 million, which is an increase of 57% over adjusted EBITDA for the third quarter of 2003 of 43.1.

These results are very much in line with the updated guidance range we provided on September 23rd, and also represent an increase of 8% over the midpoint of our original guidance range for the quarter that we provided on August 4th of this year. Reconciliations of these non-GAAP financial measures and related amounts are included in the website at www.taalp.com. 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 of the performance drivers and market conditions that affect the third quarter performance and update you on a few of our organic growth projects and acquisition activities, including a final status report on the Link integration effort. I'd point out that our strong performance in the third quarter of 2004 versus the third quarter 2003 was heavily influenced by the impact of acquisitions.

September 1st, 2003, we've completed a number of acquisitions that contributed to our results for the full three months of this year's quarter but did not contribute at all to last year's third quarter. These acquisitions include Link, the Capline and Caplet pipeline systems, the Cal Ven pipeline, the South Pass pipeline and the Ark-La-Tex pipeline. In addition, in late August of 2004, we acquired the Schaefferstown propane storage facility.

Most of my remaining comments on the third quarter performance will focus on variations relative to the original third quarter guidance that was provided on August 4th, 2004.

In our pipeline segment, our volumes at the quarter were in line with the guidance at 1.6 million barrels a day. Segment profit was $44 million, or approximately $0.30 per barrel, which exceeded our original midpoint guidance of $0.26 per barrel by approximately 15%.

Actual volumes on some of our major pipelines include 52,000 barrels a day on the All American Pipeline System, 279,000 barrels a day on the Basin pipeline system, 122,000 barrels a day on our share of the Capline Pipeline System and 68,000 barrels a day on the Manatee Pipeline System in Canada.

Our fourth quarter guidance that Phil will walk you through in a few minutes incorporates volumes on the All American System of approximately 52,000 barrels a day and this is relatively flat versus third quarter. It includes the impact of the recent successful completion of PXP's first Rocky Point well but it's masked by anticipated downtime at Exxon Mobil's Santa Ynez platform during the quarter.

Volumes on the Capline system are forecasted to be 137,000 barrels a day, and volumes on the Basin system are forecasted to be 255,000 barrels a day. All other pipeline systems are forecast to be in line with our third quarter performance.

In our gathering, marketing, terminaling and storage segment, volumes were generally in line with the expectation at approximately 663,000 barrels a day. Segment profit for the gathering, marketing, terminaling and storage for the quarter was approximately $27.3 million, or approximately $0.45 per barrel which exceeded our original midpoint guidance of $0.39 a barrel by about 15%. Third quarter segment profit per barrel reflects the improved profitability that we've been able to obtain and recognize as a result of generally favorable market conditions and continued volatility. It also reflects the impact of SFAS 133 and the foreign exchange gain that Phil will cover in his section.

The guidance for the fourth quarter that Phil will walk you through in a few minutes incorporates crude oil lease gathering volumes of approximately 640,000 barrels per day, which is relatively consistent with the third quarter levels, and LPG volumes of approximately 60,000 barrels a day which is higher due to the Schaefferstown acquisition and then also increased seasonal demand.

We do have a couple of capital projects in progress I'd like to briefly review with you. In April, we announced a pipeline construction and transportation agreement with Coffeeville Resources Refining and Marketing LOC. PAA is approximately 54% complete with the construction of 100 miles 16-inch pipeline that will transport crude oil from Cushing, Oklahoma to Caney, Kansas. The original cost for this project was estimated to be approximately $34 million subject to normal cost variances for similar projects. Based on work performed to date, increased steel prices and right-of-way issues, we now estimate that the total project costs will increase about 25 to 30%. However, overall economics of the project, are still attracted and the tariffs will be adjusted based on actual costs. We continue to expect this project to begin generating revenue during the first quarter of 2005.

Also in October, we began expansion of the Trenton pipeline system in the Rocky Mountain region. We acquired the Trenton system in the Link acquisition. PAA will construct and operate approximately 32 miles of 8-inch main line and 70 miles of 6-inch and 4-inch gathering pipelines that will connect over 75-field leases to our existing pipeline system. We estimate this will add about 15,000 to 20,000 barrels a day of crude oil to our pipeline system. In exchange for our capital commitment, we have received a long-term reserve dedications from producers whose leases are being connected. We expect the new pipelines to be operational during the second half of 2005 and the total cost of this project is about $28 million to $30 million.

I'd now like to provide a quick overview of recent acquisition activity and then give a final update on the integration of the Link assets. We did make one acquisition during the quarter. In August, we completed the acquisition of the Schaefferstown propane facility from Koch Hydrocarbon. This facility is located near Schaefferstown, Pennsylvania and has the capacity to store 20 million gallons of refrigerated propane. Propane is delivered to this facility primarily from the Pepco pipeline system and then we deliver out of facility by truck. The purchase price for this facility was $32 million plus an additional $14.2 million for inventory.

And lastly, I'll like to give you a final update on the status of the Link integration effort. As of September 30th, all major areas of integration activity were essentially completed. There are a few remaining tasks that will be finalized by the end of the year, but they are not of significant magnitude. This was our most challenging integration project to date and I want to publicly thank our staff for their hard work and outstanding results.

As you may recall from prior conference calls, we had targeted approximately $30 million of synergy, approximately 80 to 85% of which were cost savings synergies and the remainder were commercial synergies. We have achieved substantially all of the cost savings synergies and a significant portion of the commercial synergies. We anticipate realizing the remaining synergies during the first quarter of 2005.

And lastly on Link, I draw your attention to the Form 8-K that we furnished yesterday evening regarding the Texas attorney general's investigation. We have been informed by the anti-trust staff of the Texas AG's office, that the attorney general is closing its investigation into the acquisition and does not intend to pursue any additional course of action at this time. We have not yet received an indication from the Federal Trade Commission as to whether it intends to close its investigation. And with that I'll turn the call over to Phil.

Thanks, Harry. During my part of the call today, we'll review our capitalization and liquidity at the end of the third quarter and discuss our recent financing activity. In addition to that, I'll walk through our financial guidance for the fourth quarter of this year and then briefly address our preliminary guidance for next year.

At September 30th, PAA had long-term debt outstanding of approximately $838 million, book equity of just over $1 billion, and a long-term debt-to-total cap ratio of approximately 45%. Excluding the impact of selected items impacting comparability, our adjusted EBITDA-to-interest coverage ratio for the quarter was approximately 5.3 times.

Based on the midpoint of our projected 2005 EBITDA range and our projected long-term debt balance at the end of this year, our forward long-term debt-to-EBITDA ratio at the end of this year is expected to be approximately three and a half times. Since the end of the second quarter, we've been extremely active on the financing side, accessing both the equity and capital markets and also refinancing our bank facility. In late July, we accessed the public equity market by selling approximately 5 million common units, including the exercise of the underwriters over-allotment option at a public offering price of 33.25 per unit that resulted in net proceeds of approximately $161 million.

Then in August, we successfully sold 5-year and 12-year senior unsecured notes in an up-sized offering that was very well received. We placed 175 million of 4.75% 5-year notes that were priced at a slight discount that yielded approximately 4.85%, and we placed 175 million at 5.875% 12-year notes that were priced at a slight discount to yield approximately 5.95%. This pricing translated into a spread of 125 basis points over the 5-year Treasury and the 157 basis points over the 10-year Treasury.

Also in August, we increased the amount available to us under our uncommitted contained oil inventory facility from $200 million to $300 million. And then just yesterday, we closed a new $750 million 5-year senior credit facility which contains a sub-facility for Canadian borrowings of up to $300 million. The new facility lengthens our maturities, lowers our cost of credit and provides an additional $125 million of liquidity over our previous facility.

The facility is also designed to accommodate additional growth as it contains an accordion feature that allows us to increase the facility size to a billion dollars. In addition the new facility also permits the expansion of our hedged inventory facility from its current level of $300 million up to $500 million. As you'll recall, the inventory facility is used to finance the purchase of hedged crude oil inventory for storage when market conditions warrant.

These refinancing transactions and retirement of debt with the equity proceeds in the third quarter have had four notable impacts on us. First, we significantly strengthened our capital structure. Our long-term debt-to-total cap at September 30th of 2004 was 45% as compared to 52% at the end of the second quarter; and second, we extended our maturities and increased the average life of our debt. We currently have no long-term debt maturing prior to 2009 and the average life of our debt is increased from 6.1 years of June 30th of this year to 8 years at September 30th of this year.

Third, we increased our financial flexibility. Using our September 30th debt balance, since we have approximately $525 million available under committed credit lines and $240 million available under uncommitted credit lines for purchases of hedged inventory. Fourth, we significantly reduced our exposure to rising interest rates. Approximately $800 million or 95% of the total 835 million of long-term debt on September 30th was subject to fixed rate arrangements. Based on our projected year-end debt balance of around $940 million, we anticipate this relationship will be approximately 85%.

Given our belief that we're in a rising interest rate environment, our charge as management is to protect the distributable cash flow capacity of the partnership. Going forward we would anticipate maintaining a fixed rate debt component of approximately 60 to 80% of our long-term debt capital structure.

Finally, I also want to note that on September 17th, we received a credit ratings upgrade to BAA-3 with a stable outlook from Moody's. This is a significant milestone for us and we now have an investment grade rating from both Moody's and S&P. We 're currently rated BBB- with a stable outlook at S&P. And in that regard I want to reiterate our commitment to maintain a strong investment grade capital structure and business profile and also reiterate our goal of achieving a mid to high BBB equivalent rating.

Since our IPO in 1998, we've maintained a well-defined growth strategy and have publicly articulated our targeted credit metrics. Following our recent upgrade, we've tightened up on our targeted debt-to-total cap capitalization metric. Previously, we had targeted to maintain a debt-to-total cap rate ratio of 60% or less, with a definite bias towards maintaining that around 50%. Given the growth of the partnership and our ultimate ratings objectives, we've tightened this target metric to 55% or less.

Again, our bias is to maintain the metric closer to 50% or less but we believe that 55% allows reasonable flexibility for noncredit-related adjustments to book equity that do not reflect a deterioration in relative credit strength. These adjustments include, not necessarily limited to currency translation adjustments and the differences between net income and cash distributions partially caused by differences in depreciation and other non-cash items, and maintenance cap.

Let me now shift to a discussion of the partnership's financial guidance for the fourth quarter of this year. 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 acquisitions.

Before I walk through the fourth quarter guidance with you, there is one item that positively influenced our performance for the third quarter that will probably have a negative impact on fourth quarter and first quarter reported results as well. It involves a somewhat esoteric accounting issue dealing with foreign currency accounting, or in our case, US dollar denominated business activities conducted by our Canadian subsidiary which is a Canadian dollar functional currency entity.

Naturally as you can imagine, Greg and Harry decided to defer this subject to me. Although our LPG business is conducted in our Canadian subsidiary, a substantial amount of this business is transacted in US dollars. Because we enter into a physical sales contract at the time we purchased the LPG inventory and both the purchase and the sale are denominated in the same currency, which in this case is US dollars, it does not create a true economic currency exposure. However, under SFAS 52, GAAP requires us to revalue US dollar denominated monetary accounts on the books of our Canadian sub while the inventory account on their books cannot be revalued.

The effect of this is that we can end up with gains or losses on our P&L mainly when we build inventory in one quarter that won't be sold until a future quarter and simultaneously experience a material strengthening or weakening of the US versus Canadian exchange rate. Somewhat similar to SFAS 133 type adjustments, we expect that these type gains and losses should substantially reverse themselves to future periods as the inventory is delivered to fulfill the physical contracts that were put in place at the time that the inventory was purchased and subject to further variances in the currency exchange rates.

This has not been a big factor for us in the past and just as an example of the cumulative impact in 2003 was a total of approximately $300,000. As a result of the overall growth of our LPG business, however, the significant increase in LPG prices over the last 12 months and the strong rally by the Canadian dollar, it is something that's worthy of discussion and something we will point out in the future if these conditions persist.

That's somewhat of a long story to tell you that we will focus on this in our narrative when it has materially influenced our quarter's operating results and we believe it is likely to reverse in the next quarter or two. As a case this point, at the time we prepared our original guidance for the third quarter of 2004, we did not forecast this situation to have any notable impact. However, by mid-September, we recognized the strengthening of the Canadian dollar, combined with the build of our LPG inventory.

Therefore when we increased the midpoint of our third quarter EBITDA guidance range on September 23rd by approximately 7.5 million, included in that amount was an estimated gain of approximately 1.5 million related to the foreign currency issue. As it turns out, the actual total impact was approximately 2.9 million, or about $1.4 million more than forecasted. Even though we've highlighted the full 2.9 million in our selected items impacting comparability table, when you evaluate our performance for the third quarter relative to our increased guidance, you need to add back approximately 1.5 million to our adjusted EBITDA for the quarter of 67.6 million in order to get really an apples-to-apples comparison versus the updated guidance.

While we don't know for sure what the impact of the currency issue will be in the subsequent quarters, we do expect that these gains should substantially reverse when the inventory is delivered to fulfill the physical contracts. Accordingly, we have included in our guidance range for the fourth quarter our estimates of the range of this reversal. Our fourth quarter guidance range also allows for the fact that winter weather conditions will actually dictate which quarter of the inventory will be delivered to our customers. I would point out that this issue should not materially affect our annual guidance since the full cycle of inventory builds and draws for LPG should occur within the four quarter projection period.

Now you know why Greg and Harry deferred that topic to me. And with that accounting tutorial behind us, we would guide you to an EBITDA range in the fourth quarter of 2004, excluding the impact of the foreign currency revaluation gains and losses, of from 62 million to 69 million and that's a midpoint of 65.5 million. We estimate the reversal of the FX revaluation gain for the fourth quarter to be approximately $1 million to $2 million. If that turns out to be the case, our actual reported results will be reduced by that amount.

For interest expense purposes, we anticipate average debt balances of approximately $900 million during the quarter, resulting in interest expense o f $13.7 to $14 million using a weighted average interest rate of approximately 6.2% which includes our fixed rate debt, revolver commitment fees, amortization of long-term debt premiums and discounts and deferred amounts associated with terminated interest rate hedges.

As I noted above, 800 million of our debt bears interest at a fixed rate. As such variations from our estimated debt balance will bear interest at a floating rate of approximately LIBOR plus 87.5 basis points.And finally, we estimate depreciation and amortization to be approximately 16.8 to 17 million during the quarter.

Based on these estimates, we forecast net income of 31 million to 38.5 million, and that's approximately $0.41 to $0.52 per limited partner unit. You should note that while total net income for the partnership is not impacted by the change in our annualized cash distribution level from 231 per unit to 240 per unit, the forecast for net income per limited partner unit for the fourth quarter incorporates a reduction of approximately $0.01 per limited partner unit as a result of the increase which reflects the impact of the general partners' 25% incentive distribution.

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 fourth quarter excludes any potential gains or losses associated with this accounting statement as well as other minor items that affect comparability between quarters. For more detail on these projections as well as other assumptions, I would direct you to the 8-K that we filed this morning. In that 8-K that we filed this morning, we provided the fourth quarter guidance as well as the resulting guidance for the full year of this year.

The fourth quarter guidance, when added to our actual results for the first nine months of the year, equates to an EBITDA range for this year of approximately 248 million to 255 million with a midpoint of approximately $251.5 million and a net income range of approximately $139 million to $146 million. That equates to approximately 202 to 214 per limited partner unit. These estimates exclude the selected items impacting comparability that were included in our results for the first nine months of the year and the estimated foreign currency revaluation losses forecasted for the fourth quarter of this year.

And finally, before I turn the call over to Greg, I also want to note that we have not updated the preliminary guidance for 2005 that we provided during the last quarterly conference call. We are currently in the process of preparing our detailed annual forecast and capital plans for next year. We reiterated our preliminary guidance for 2005 in the 8-K that we filed this morning, which forecasts EBITDA for 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 7% increase over our midpoint estimate of 2004 EBITDA again excluding selected items impacting comparability.

The other two guidance items for 2005 that I want to highlight our interest expense and maintenance capital. We anticipate interest expense for next year will range between $54 million and $58 million. Approximately 1.6 million of that projected interest expense is expected to be non-cash as it relates to the amortization of deferred amounts associated with terminated interest rate hedges. For maintenance capital, we would expect to spend between $15 million and $18 million next year. Additional information on 2005 is included in the guidance-related 8-K that we filed earlier today. I would caution that this guidance again is still preliminary and that we'll provide more detailed guidance in February after we complete our formal planning process. And then with that now I'll turn the call back over to Greg.

Thanks, Professor Phil. In closing, I want to reiterate what we believe are the five important take-away points from today's call. First, the integration of the Link acquisition has been substantially completed. We have achieved our targeted synergies and as evidenced by the third quarter results and our outlook for the fourth quarter, our base business is performing well.

Second, based on our preliminary guidance range, we expect 2005 to be another strong year as EBITDA is expected to increase approximately 5% to 9% over the midpoint of our projected 2004 EBITDA range which excludes the selected items impacting comparability, and that's without regard to future acquisitions.

Third, we continue to generate attractive organic growth opportunities as evidenced by the recent Phase 4 expansion in our Cushing terminal and the two pipeline projects currently under construction that Harry discussed earlier. Fourth, we had excellent distribution coverage and good visibility for future distribution increases.

And fifth and finally we have an extremely strong and flexible balance sheet and liquidity position that we are committed to maintaining. As a result we are well positioned to continue to capitalize on future acquisition opportunities. In addition through our recent financing activities, we are well protected against anticipated increases in interest rates.

Before I open the call up for questions, I want to thank everyone that attended our analyst meeting on September 27, 2004. We had an excellent turnout with a final tally of approximately 90 outside participants. For those that haven't yet seen the slides we shared at the presentation, I encourage you to visit our web site at www.paalp.com. The entire presentation that we made on September 27th encompasses approximately 250 slides.

For your convenience we have posted these slides on websites in eight subsets which track the eight topical discussion sessions covered during the presentation. These eight subsections cover a number of topics including our business strategy, an overview of the crude oil market, a review of our business and approach to acquisitions. In addition, we also provided sections that address our absolute and relative returns on capital invested, a return of our excuse me, a review of our financial growth strategy, and also a teaching on how we develop our guidance for the upcoming quarter and calendar year. The final section of the presentation addresses the partnership's outlook for the future and the challenges that we and other MLPs face.

As we have for the past several years during the year-end results conference call, we will provide a recap of our performance against goals that we set at the beginning of the year and also share with you our new goals for 2005, as well as more detailed operating financial guidance for the upcoming year. That wraps up the items on our agenda and we would like to thank you-all for participation in today's call. We realize there are some other topical events happening as well. For those of us who joined us late, a complete written transcript of the prepared comments of this call will be posted on our web site at www.paalp.com very shortly. And, Jackie, at this time we're ready to open the call up for questions.

[Operator Instructions]. Your first question is coming from David Fleischer of Cane Anderson.

Hello, Greg. I wanted to go to the Link acquisition where you've indicated that you've essentially integrated it and are achieving synergies. I wanted to go back to your guidance of $52 million to $57 million that you had given us earlier and update that figure and, you know, is that the figure that you still would be guiding people to for full year '05 or is there another number? And as you look at the business, particularly in this changed pricing environment, I just want to understand better how you are managing any commodity price risk just to be sure, get more comfortable that there isn't commodity price exposure there.

Sure. Dave, I'll let Harry take the second part of that question. The first one is, really relates to projected cash flows from the investment of, you know, roughly 340 to 350 million on the Link transaction. Just to review for those that aren't familiar, when we acquired that, Link, it had a run rate of approximately $25 million of EBITDA at the time. We gave an estimate of a range that was initially between 20 million and 30 million of synergies. We later on fine-tuned that to a number that was between I believe it was 28 to 32. So call it 30 million of synergies.

As we sit here today, we feel very comfortable. We have achieved and as Harry said, there's a few odds and ends to be done that really won't be realized until the fourth quarter, first quarter of next year, but they are actually in process now. So it 's easy to say at this point in time, we have achieved the 55 million number, whether that's 56 or 54 it's kind of hard to tell. Part of the goal of integration is the identity to lose those assets by reducing costs, etc to meld them into our system.

The challenge that also is in front of us at the time that we avoided trying to take detailed questions on and will still do so a little bit was what kind of volume recovery could we get out of those assets and again I say that because not to be evasive but because part of the whole goal here is, when you integrate an asset is to get the most out of it by eliminating costs and blending it in. So we're starting to lose the identity, if you will, of some of their assets, especially on the gathering marketing side. The pipeline side's fairly easy because you've got stated tariffs and you've got volumes that you can track.

So what will happen is you'll see, I believe, Dave, you know, the uplift in the 2005 numbers that are associated when we get to our planning stage, with any volume recoveries that we believe we could get on those systems. A case in point of something that kind of gets elusive is when we acquired Link, you know, the Trenton project, pipeline that they had was doing X a day in terms of volumes and clearly we're spending more money and raising that by roughly 15 to 20,000 barrels a day. That in and of itself creates other opportunities farther on down the line.

So, what I can say definitively is we can declare success and victory on the 55 million, you know, give or take a million or two either way and that we hope to be able to extract more value out of that through a combination of simply volume recapture as well as spending additional capital on these assets to capture additional volumes that weren't possible before for Link. Does that cover that first part of it?

Yeah. I mean, the only follow-up, I mean, I would hope you. I expected you to say something like that. I was just wondering if you might be exceeding your earlier expectation. You haven't said that you have. Maybe the other side of that might be on the growth side of the equation. You mentioned the Trenton investment, you know. Are there other significant type investments that you can make off these assets? Do you see this as an asset that you can create reasonable or more than reasonable growth off of?

As far as did we exceed our original expectation on Link, you have to conclude when we had, you know, an original very realistic but nonetheless probably conservative target of 18 months to realize those synergies and we did it in nine months, we by far and away achieved or exceeded you know what we set out as cash flow realizations. As far as additional opportunities like Trenton, there's nothing that's risen to the level that we can share at this point in time, but if you roll back the clock four or five months ago, we couldn't share Trenton at that time, either, because there was a lot of moving pieces.

So, what we can say is the benefits of scale and scope acquisitions and additional synergies that come out of the woodwork, sometimes they're necessary to offset, you know, things that you didn't anticipate that are negative, but so far we're real pleased with where we're at and where we're going, and I do think we will see additional opportunities to capture more volumes or to spend more capital to expand our network. In the future, it will be harder and harder to tell whether that's a Link-related opportunity or whether that's an opportunity that is made possible by the combination of those assets.

OK.

On the commodity price exposure, Dave -- this is Harry, basically the oil that we purchase and the LPGs that we purchase and resell, on crude oil, you know, we're buying on an index or spread-related basis and we're selling on an index or spread-related basis. So we have a little exposure to gray differentials but not outright price exposure. And then on LPGs, we buy and back-to-back resell our LPG. So, you know, we don't have any commodity, outright commodity price exposure in our business.

OK. Second other question, just an update on what you're assuming next year in pipeline integrity costs in Sarbanes-Oxley versus this year's number.

Dave, I'll beg off a little bit on that. What we've just completed on many of the Link assets, running the smart pays (ph), we're in the process of interpreting that. We've included a forecast in our numbers that really is a placeholder that will be fine-tuned. For instance, I think we've given guidance on the maintenance CapEx for next year of 15 to 18 million. I expect it to come into that range. Will it be 19 when we get done or will it be 14, I don't know yet until we see some of the results, but we've had a pretty good history of understanding the condition of our pipes o n PAA and we're developing a much better understanding of the condition of the pipes that we've got from Link.

So far we haven't been surprised adversely or real positively by what we found. So I feel like we'll probably be pretty close in there but, you know, if it comes back at the end of the day and we've got to say maintenance CapEx next year is 22, that's not going to be indicative of a trend. It's indicative of a catch-up issue. Conversely, it could be at 14. We really don't know yet.

As far as the expenses associated with that, there will constantly be a battle between what's expense and what's capital. We won't know that until we get in the field and figure out whether we're actually spending dollars to replace sections of pipe if necessary or simply spending dollars to test pipe to convince ourselves that there is no need to replace it. But overall we haven't seen anything significantly adverse come out or significantly favorable.

I will say that, you know, we spent a lot of time on environmental-related analysis on these assets and there was a long history in a certain segment of these assets, and there we have been pleased so far that we've been able to get our arms around it and certainly feel like we'll come well within, you know, the estimate of what we thought we could take care of those conditions for. If you recall, we had a sharing arrangement with Shell that if it exceeded a certain amount, they would start to participate. You know, our goal is to not have them participate because it reduces our cost, it makes them happy for us, maybe they will sell us more assets at a good price.

The other thing on pipeline integrity, David, is that unlike product pipelines, most of our pipelines are in rural areas. They are not, you know, going through cities or large metropolitan areas. They don't operate at the high pressures that product pipelines operate. So you wouldn't expect the crude oil lines to have the same, you know, integrity costs that, you know, a similar size product pipeline would have.

OK, thank you.

Thanks, David.

Thank you. Your next question is coming from Yves Siegel of Wachovia Securities.

Good afternoon, good morning, everybody. Two questions. One for Phil, I'm sorry. I missed the thought process that went into the--that was behind sort of increasing the amount of leverage that you are comfortable with. Could you just review that again? And also, what would that be in terms of a debt-to-EBITDA coverage ratio? That's the first question. And the second question is, Greg or Harry, do you have any qualitative discussion in terms of what the acquisition market may look like going forward and what's the outlook perhaps to expand in Canada? Thank you

Yves, This is Phil. The first part of the question with respect to the thought process of lowering that targeted metric from 60% to 55%, you know, we've been inside of or around. We really had more of an idea of trying to hit a 50% ratio. As we have gotten bigger, our susceptibility to slip into a little higher leverage ratio has decreased some and so we have just lowered that targeted metric a little bit, but there's still a bias which is about the same as it was of around 50% or less. And we have been inside, around that for quite a while really.

Yeah, just to clarify, I think what you said it sounded like you thought we were increasing our tolerance for leverage. We're actually tightening it up to a lower level so that we basically try to make sure our targets reflect what our real bias is, which is to maintain around 50% or less. Previously the 60% was there because of accounting phenomenon and as Phil said when you are smaller, you know an adjustment in either foreign currency translation or OCI, other comprehensive income, could affect that ratio, and we didn't want to be needing to raise equity simply because of some accounting phenomenon. But as we've gotten bigger, and also we want to send the signal to the rating agencies that we are serious about maintaining a mid to high BBB rating or achieving that and we simply wanted to tighten it up so that we're saying that we have less tolerance for debt now.

I apologize. What does that translate into debt to EBITDA is there?

Well, still our target has been around 3-1/2 to 1. It could be 3.6, 3.4 which, I think if you compare it to the industry and especially many of what I'd say our pure pipeline peers are, you know we're probably you know 50 basis points underneath them on that. A lot of them are running about 4 to 1. So I would still say we are one of the more conservative in capital structure out there.

Great. OK. Thanks.

On acquisitions, really no different story or outlook today than, you know, what we would have shared three months, six months or nine months ago. We're very active on opportunities. As is often the case, you know, you chase, you know, five or six to get, you know, one and some cases you chase five or six and you don't give them and you chase the next five or six. I would say that there's been some activity in the MLP sector that has either, you know, possibly distracted some of the competition.

So, you know, conceivably you could say it's less competitive today because there's, you know, some people for the next six or nine months that may be tied up with other activities. So we would love to make hay right now while that's the case, but it does require you to make the seller make the same, the right decisions within that same time period, but I would say we are still very confident in our outlook that we can achieve on average $200 million to $300 million a year in acquisitions. And in fact, part of what we're in the process of doing right now is figuring out whether we need to tweak that number up some given the fact that our scale has grown and we have, you know, a larger footprint out there to have additional synergies in areas that we didn't have before.

As far as the question about Canada, clearly that's an area that we've always been interested in. When we made our first foray into Canada back in 2001, the ratio of EBITDA contribution to the total entity with that acquisition was around 25% As we've grown, we've grown both U.S. and the Canadian cash flow really in lockstep and it still represents about that same percentage contribution, and I'm including in that the LPG since it's obviously related and based out of our Canadian crude oil operations, and we would expect that to continue. So, you know, it's I think it's a good time for PAA on the acquisition trail.

Greg, my last question. As you said today, has the acquisition market changed substantially, or going forward over the next three years, would you expect the level of acquisitions to stay the same? I'm talking more industrywide. I understand that you probably want to go beyond that 200 million to 300 million but as you look out, you know, two to three years, would you say the same, greater, or less in terms of what kind of acquisition activity you think might be out there?

The way you phrase it, I can give you my personal opinion and that is I think it's going to be at least as good as the past and I think it actually could see some higher overall levels. I think you could see some bigger transactions. I clearly think part of one of those that will be a contributor to that fact is I think you will see MLP consolidation in the future and that's certainly going to get factored into the overall numbers that get reported, and because there are increasingly a higher level of embedded synergies into, you know, combining public entities nowadays.

OK. Thanks so much.

Thank you.

Thank you. Your next question is coming from Ross Payne of Wachovia Securities.

How are you doing, guys. Most of my questions have been asked but I wanted to just ask you, how much of an interest rate increase do you have embedded in your budget for '05?

Phil, you and Al there, I think we've got the forward curve factored in. Is that right?

Yes, that's exactly correct.

Realizing, Ross, that as we sit here today I mean we are you know 85% fixed or higher so that it really can't have much impact but I think what we've done is just take the outlook for LIBOR for the next year and then factored our credit spread on top of that to apply to the average of the floating debt for next year.

OK, very good. And, Greg, you obviously had good foresight in terms of the mergers between the MLPs given the news we heard earlier this week.

Well, predicting what's going to happen is not as fun as participating in it if it pays money for the unit holders. So, we are still, we are still anxious to do that.

I hear you. Thanks, guys.

Thank you, Ross.

[Operator Instructions]. Your next question is coming from Ron Londe of AG Edwards.

Thanks. Given the price of crude oil right now, what's your vision of the growth rate in a gathering business? I would expect that producers out there are trying to maximize their production in as much as possible and you benefited this year. Is there much room for growth next year in that business?

You know, Ron, it's a great question. It's a challenge because, you know, when crude oil moved from, you know, in the teens to the 20s and 30s, everybody anticipated a wave of drilling that really never came. When it moved into the 40s, they anticipated. We're seeing overall activity levels. Certainly they are not decreasing. In fact, they are elevating, but they are not increasing by huge percentages. But what with the kind of commodity prices that are out there and the ability to lock it in on a forward basis, I can't think it's going to get anything but, you know, better than what it has been. Whether it's a lockstep increase, I'm not sure.

I think, Harry, looked at the average declines over the last couple of years in terms of on-shore depletion and it really has been almost nonexistent or 1 to 2 percent declines. You know compared to what was higher numbers before. So certainly in areas like West Texas where you've got not only, you know, secondary recovery but tertiary recovery going and then also additional drilling and step out, you know, I would think we're looking at a fairly robust outlook as we go forward. Now there's obviously competitive factors with respect to other companies that are in the crude midstream business that we've got to take into account, but I think we'll hold at least our market share and I think the market's getting no smaller and it could be getting slightly bigger.

What's your perspective on Rocky Point and then the maintenance that's going on offshore? When is that going to kind of filter out? Is that in the first quarter of next year or farther out?

Well, anytime it comes to Rocky Point, I've got my pom poms and my megaphone out. We're cheering for them. They brought on evidentially a very good well initially and they have got additional drilling activity to go. I think we're still, we moderated our outlook for OCS decline, if you recall, for since we went public in 1998 we, you know, projected that based upon what we could see in the history, in the future; and of course that point in time we also, this management team was very involved in the Plains Resources which had control of Forniguao (ph) which is related to Rocky Point, and we forecasted that 7% was the annual decline that we were looking out for. If you-- you know, whether we were lucky or just good, but if you look at hindsight, it's been about 7%.

As we go forward, I think we've moderated that to down into the 3 or 4% to account for the fact that, one, you've got higher oil prices and so there's more incentive to do some things with the wells that might not have been economic as long and then, second, to reflect the impact potentially of Rocky Point and, you know, I hope when we're meeting this time next year, you know, we're maybe talking about increasing or certainly, you know, holding it flat whereas right now I think it's still prudent for us to project a decline. We just don't think it's going to be as much as it has before.

So, I think in our preliminary 2005 guidance, we had projected that the decline would just about drop in half than what we have been projecting and that we're keeping our eyes open for developments that let us fine-tune that hopefully with a bias toward the upside. But, you know, the good news is that OCS has gone from when we went public around 60%, if not a little bit more of our cash flow, and today it's, you know, around 10 or 11% and the absolute dollar amount has stayed about the same. So, you know, we'll continue to monitor that. It's not going to cause a huge great benefit, one way or the other, I don't think it's going to cause a detriment if we're off in our decline curve.

Ron, the maintenance and downtime, OCS in the fourth quarter, the volume should be back up by the end of the fourth quarter but, you know, it's not huge volumes that are impacted. I mean, you add a couple of thousand barrels, 3,000 or 4,000 barrels at Rocky Point offsetting 3,000 or 4,000 barrels a day as, you know, downtime and maintenance fourth quarter versus third quarter of this year. And we understand part of that downtime maintenance may not have been necessarily at the platforms at Exxon Mobil but perhaps more to refineries.

You know, in the San Joaquin Valley, what's your experience there with gathering?

Our volumes are pretty stable.

You know, we don't really have much of a merchant function in the San Joaquin Valley. We operate that pipeline more like a common carrier line and our volumes been very steady. You know, in the 70, low 70,000 barrel a day volume range, moving crude back down into the Los Angeles area.

You know, obviously one of the developments I'm sure you are aware of through other entities that you follow is that there was expected to be a shutdown of the Bakersfield refinery October 1st. That's been deferred to as late as I think mid-March of next year. That refinery, the final outcome for that will have some impact on crude flows and gathering volumes in the San Joaquin Valley but it's kind of hard to predict at this point in time. When we thought it was going to shut down October 1st, we weren't projecting a big windfall, nor a big detriment and we're kind of in the same place now.

OK thanks.

Thank you Ron.

Thank you. Your next question is coming from Mark Easterbrook of RBC Capital Markets.

Good morning. I got on kind of late. Maybe this question's already been asked. But of the two transactions that came about on Monday, the Pacific transaction and the Canaan transaction were you guys looking at either one of those or was it just between those parties?

Mark, I couldn't comment one-way or the other. Between lawyers and reg FD issues, I think I would get caught somewhere in between. So I just couldn't comment.

Thanks.

Thank you.

[Operator Instructions] I'm showing no further questions, and I would like to turn the floor back over to Greg Armstrong.

Thank you, Jackie, and thanks to everybody for participating in this morning's call. As we said, we know there are a few distractions out there in both the financial markets as well as the political markets. We look forward to providing you an update on our performance for 2004 and also our outlook for 2005 in the conference call that will likely occur in February of 2005. Thank you very much.

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