Plains All American Pipeline, L.P. (PAA)

Note 8—Long-Term Incentive Plans

Our general partner has adopted the Plains All American GP LLC 1998 Long-Term Incentive Plan and the 2005 Long-Term Incentive Plan, collectively referred to as our Long-Term Incentive Plans (“LTIP”), for employees and directors of our general partner and its affiliates who perform services for us.  Awards contemplated by our LTIP include phantom units, restricted units, unit appreciation rights and unit options, as determined by the compensation committee or the board of directors (each an “Award”). Under our LTIP, up to 4.4 million units may be issued in satisfaction of Awards.  Certain Awards may also include distribution equivalent rights (“DERs”) at the discretion of the compensation committee or the board of directors.  Subject to applicable vesting criteria, a DER entitles the grantee to a cash payment equal to cash distributions paid on an outstanding common unit. Upon vesting, certain of the Awards may be settled in common units or equivalent cash value at the election of our general partner. Our general partner will be entitled to reimbursement by us for any costs incurred in settling obligations under our LTIP.

As of June 30, 2006, there were approximately 2.2 million unvested phantom units outstanding with a weighted average grant-date fair value of approximately $32.22 per unit.  In addition, approximately 1.6 million of these Awards include DERs. Approximately 1.5 million of the Awards vest over a six-year period (with performance accelerators), while the remaining awards vest over time only if certain performance conditions are met and are forfeited after six years if the performance conditions are not met. The DERs vest over time (with performance accelerators) and terminate with the vesting or forfeiture of the related phantom units.

In addition, four of our six non-employee directors each have received an LTIP award of 5,000 units. These awards vest annually in 25% increments (1,250 units each). The Awards have an automatic re-grant feature such that as they vest, an equivalent amount is granted. For the other two non-employee directors, any

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director compensation is assigned to the entity that designated them as directors. In those cases, no LTIP award was granted, but in lieu thereof, an equivalent cash payment is made.

We adopted Statement of Financial Accounting Standards No.123(R) (revised 2004), “Share Based Payment” (“SFAS 123(R)”) on January 1, 2006 (See Note 13 for a discussion of recent accounting pronouncements). Under SFAS 123(R) the fair value of the Awards, which are subject to liability classification, is calculated based on the market price of our units at the balance sheet date adjusted for (i) the present value of any distributions that are probable of occurring on the underlying units over the vesting period that will not be received by the award recipients and (ii) an estimated forfeiture rate when appropriate. This fair value is then expensed over the period the Awards are earned. In addition, we recognize compensation expense for DER payments in the period the payment is earned.

We recognized expense related to our LTIP of approximately $6 and $8 million during the second quarter, and $17 million and $10 million during the first six months of 2006 and 2005, respectively.  Additionally, we have an accrued liability of approximately $35 million associated with our LTIP as of June 30, 2006.

As of June 30, 2006, the weighted average contractual life of our outstanding Awards was approximately five years. Based on the June 30, 2006 fair value measurement, we expect to recognize an additional $56 million of expense over the life of our outstanding Awards related to the remaining unrecognized fair value. This estimate is based on the market price of our limited partner units at the end of the period and actual amounts may differ materially as a result of a change in market price. We estimate that the remaining fair value will be recognized in expense as shown below (in millions):

		LTIP
		Fair Value
Year		Amortization
2006 (1)		$	13.5
2007		19.1
2008		12.9
2009		8.4
2010		2.3
Total		$	56.2

 

(1) Includes LTIP fair value amortization for the remaining six months of 2006.

Long-term Incentive Plans.   Effective January 1, 2006 we adopted SFAS 123(R) Share-Based Payment, resulting in a cumulative effect of change in accounting principle gain of $6.3 million. The majority of phantom unit grants outstanding under our 1998 and 2005 Long-Term Incentive Plans contain vesting criteria that are based on a combination of performance benchmarks and service period. The majority of the phantom units awarded under the 2005 plan primarily vest in various percentages on the later of 1) May 2007, May 2009, and May 2010, or 2) achievement of annualized distribution levels of $2.60, $2.80, $3.00, respectively, and for certain grants, $3.10 per unit. The majority of the phantom units have a final service period vesting in 2011. In addition to exceeding the distribution level of $2.80, it has been deemed probable that the $3.10 distribution level will be achieved. Accordingly, guidance includes, for phantom units tied to performance levels of $3.10 or less, an accrual over the corresponding service period. For 2006, the guidance includes approximately $36.3 million of principally non-cash expense associated with these phantom units. The earliest significant vesting event for outstanding grants will occur in 2007.

The actual amount of LTIP expense amortization in any given year will be directly influenced by our unit price at the end of each reporting period and the amount of amortization in the early years, and will also be increased if a determination is made that achievement of any of the remaining performance thresholds is probable. Therefore, market variables could cause actual net income to differ materially from our projections.

11.         

Long-term Incentive Plans.   Effective January 1, 2006 we adopted SFAS 123(R) Share-Based Payment, resulting in a cumulative effect of change in accounting principle gain of $6.3 million. The majority of phantom unit grants outstanding under our 1998 and 2005 Long-Term Incentive Plans contain vesting criteria that are based on a combination of performance benchmarks and service period. The phantom units under the 2005 plan primarily vest in various percentages on the later of 1) May 2007, May 2009, and May 2010, or 2) achievement of annualized distribution levels of $2.60, $2.80, $3.00, respectively, and for certain grants, $3.10 per unit. The majority of the phantom units have a final service period vesting in 2011. In addition to exceeding the distribution level of $2.80, it has been deemed probable that the $3.10 distribution level will be achieved. Accordingly, guidance includes, for phantom units tied to performance levels of $3.10 or less, an accrual over the corresponding service period. For 2006, the guidance includes approximately $36.3 million of principally non-cash expense associated with these phantom units. The earliest significant vesting event for outstanding grants will occur in 2007.

The actual amount of LTIP expense amortization in any given year will be directly influenced by our unit price at the end of each reporting period and the amount of amortization in the early years, and will also be increased if a determination is made that achievement of any of the remaining performance thresholds is probable. Therefore, market variables could cause actual net income to differ materially from our projections.

11.         

Note 9—Long-Term Incentive Plans

Our general partner has adopted the Plains All American GP LLC 1998 Long-Term Incentive Plan (the “1998 LTIP”) and the 2005 Long-Term Incentive Plan (the “2005 LTIP”) for employees and directors of our general partner and its affiliates who perform services for us. Our general partner’s board of directors has the right to alter or amend the 2005 LTIP and the 1998 LTIP or any part of the plans from time to time, including, subject to any applicable NYSE listing requirements, increasing the number of common units with respect to which awards may be granted; provided, however, that no change in any outstanding grant may be made that would materially impair the rights of the participant without the consent of such participant. Awards contemplated by the 2005 LTIP include phantom units, restricted units, unit appreciation rights and unit options, as determined by the compensation committee or the board of directors (each an “Award”). Up to 3 million units may be issued in satisfaction of Awards under the 2005 LTIP. Certain Awards may also include distribution equivalent rights (“DERs”) in the discretion of the compensation committee or the board of directors. A DER entitles the grantee to a cash payment, either while the award is outstanding or upon vesting, equal to any cash distributions paid on a unit while the award is outstanding. Our general partner will be entitled to reimbursement by us for any costs incurred in settling obligations under the 2005 LTIP. Certain of these Awards could be considered a common stock equivalent and thus be dilutive to our earnings per unit from the time of their date of grant. Awards contemplated by the 1998 LTIP include phantom units and unit options. The 1998 LTIP currently permits the grant of phantom units and unit options covering an aggregate of 1,425,000 common units. No unit option grants have been made under the 1998 LTIP to date. However, the compensation committee or the board of directors may, in the future, make grants under the plan to employees and directors containing such terms as the compensation committee or the board of directors shall determine, provided that unit options have an exercise price equal to the fair market value of the units on the date of grant.

A phantom unit entitles the grantee to receive, upon the vesting of the phantom unit, a common unit (or cash equivalent, depending on the terms of the grant). The compensation committee or the board of directors may, in the future, make additional grants under the plans to employees and directors containing such terms as the compensation committee or the board of directors shall determine. Approximately 97,000 of the phantom units outstanding under the 1998 LTIP vested in 2005. We paid cash in lieu of delivery of common units for approximately 25,000 of the phantom units and issued approximately 47,000 new common units (after netting for taxes) in connection with the vesting. As of December 31, 2005, there are approximately 48,275 phantom units outstanding under the 1998 LTIP, which have vesting terms over the next four years, if certain performance criteria are met. The majority of the awards outstanding under the 1998 LTIP have performance-based vesting terms and, therefore, we recognize expense when it is considered probable that the performance criteria will be met.

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Long-term Incentive Plans.   Effective January 1, 2006 we will adopt SFAS 123(R) Share-Based Payment, resulting in a cumulative effect of change in accounting principle of approximately $6.4 million. The majority of phantom unit grants outstanding under our 1998 and 2005 Long-Term Incentive Plans contain vesting criteria that are based on a combination of performance benchmarks and service period. The phantom units under the 2005 plan primarily vest in various percentages on the later of 1) May 2007, May 2009, and May 2010, or 2) achievement of annualized distribution levels of $2.60, $2.80 and $3.00 per unit, respectively, and the majority of the phantom units have a final service period vesting in 2011. In addition to exceeding the distribution level of $2.60, it has been deemed probable that the $3.00 distribution level will be reached. Accordingly, guidance includes, for phantom units tied to performance levels of $3.00 or less, an accrual over the corresponding service period. For 2006, the guidance includes approximately $34.6 million of principally non-cash expense associated with these phantom units. The earliest vesting event for outstanding grants will occur in 2007.

The actual amount of LTIP expense amortization in any given year will be directly influenced by our unit price at the end of each reporting period and the amount of amortization in the early years and will also be increased if a determination is made that achievement of any of the remaining performance thresholds is probable. Therefore, market variables could cause actual net income to differ materially from our projections.

11.         

Long-term Incentive Plans.  The majority of phantom unit grants outstanding under our 1998 and 2005 Long-Term Incentive Plans contain vesting criteria that are based on a combination of performance benchmarks and service period. The phantom units under the 2005 plan generally vest on the later of 2 years, 4 years or 5 years, or achievement of annualized distribution levels of $2.60, $2.80 and $3.00 per unit, respectively, and the majority of the phantom units have a final service period vesting in 2011. In addition to exceeding the distribution level of $2.60, it has been deemed probable that the $2.80 distribution level will be reached. Accordingly, guidance includes, for phantom units tied to the $2.60 and $2.80 performance levels, an accrual over the corresponding service period. For the phantom units that vest when the $3.00 performance threshold is achieved but have a final service period vesting in 2011, guidance includes a pro rata accrual associated with a six-year service period. For 2005, the guidance includes approximately $23.8 million of principally non-cash expense associated with these phantom units. The actual amount of LTIP expense amortization in any given

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year will be directly influenced by fluctuations in our unit price and the amount of amortization in the early years and will also be increased if a determination is made that achievement of any of the remaining performance thresholds is probable.

11.         

Long-term Incentive Plans.  The majority of phantom unit grants outstanding under our 1998 and 2005 Long-Term Incentive Plans contain vesting criteria that are based on a combination of performance benchmarks and service period. The phantom units under the 2005 plan generally vest on the later of 2 years, 4 years or 5 years, or achievement of annualized distribution levels of $2.60, $2.80 and $3.00 per unit, respectively, and the majority of the phantom units have a final service period vesting in 2011. Accordingly, guidance includes (i) for phantom units tied to the $2.60 and $2.80 performance levels, an accrual over the corresponding service period, as it has been deemed probable that the $2.80 performance level will be reached, and (ii) for the phantom units that vest when the $3.00 performance threshold is achieved but have a final service period vesting in 2011, a pro rata accrual associated with a six-year service period. For 2005, the guidance includes approximately $24.5 million of principally non-cash expense associated with these phantom units. The actual amount of LTIP expense amortization in any given year will be directly influenced by fluctuations in our unit price and the amount of amortization in the early years and will also be increased if a determination is made that achievement of any of the remaining performance thresholds is probable.

11.         

Long-term Incentive Plans.   The majority of phantom unit grants outstanding under our 1998 and 2005 Long-Term Incentive Plans contain vesting criteria that are based on a combination of performance benchmarks and service period. The phantom units under the 2005 plan generally vest on the later of 2 years, 4 years or 5 years, or achievement of annualized distribution levels of $2.60, $2.80 and $3.00 per unit, respectively, and the majority of the phantom units have a final service period vesting in 2011. Accordingly, guidance includes i) for phantom units tied to the $2.60 performance level, an accrual over the corresponding service period, generally 2 years, as it has been deemed probable that the $2.60 performance level will be reached, and ii) for the phantom units that are not tied to the $2.60 performance threshold but have a final service period vesting in 2011, a pro rata accrual associated with a six-year service period. For 2005, the guidance includes approximately $20.2 million of principally non-cash expense associated with these phantom units. Management has not completed its probability assessment of reaching future performance thresholds beyond the $2.60 level. If the $2.80 distribution threshold were deemed probable assuming a $42.00 unit price, an additional $1.4 million, $0.9 million and $0.9 million would be charged in the second, third and fourth quarters of 2005, respectively. This additional charge would impact earnings per limited partner unit by $(0.02), $(0.01) and $(0.01) for these periods. The actual amount of LTIP expense amortization in any given year will be directly influenced by fluctuations in our unit price and the amount of amortization in the early years and will also be increased if a determination is made that achievement of any of the remaining performance thresholds is probable.

11.         

Note 7—Long-Term Incentive Plans

        Our general partner has adopted the Plains All American GP LLC 1998 Long-Term Incentive Plan (the "1998 LTIP") and the 2005 Long-Term Incentive Plan (the "2005 LTIP") for employees and directors of our general partner and its affiliates who perform services for us.

        As of March 31, 2005, there are approximately 150,000 phantom units outstanding under the 1998 LTIP, of which we expect approximately 93,000 to vest in May 2005. The majority of the awards outstanding under the 1998 LTIP have performance-based vesting terms and, therefore, we recognize expense when it is considered probable that the awards will vest.

        In February 2005, our Board of Directors and Compensation Committee approved grants of approximately 1.9 million phantom units and 1.4 million distribution equivalent rights ("DERs) under the 2005 LTIP. Approximately 1.4 million of the phantom units vest over a six year period (with performance accelerators) while the remaining awards vest over time only if certain performance criteria are met and are forfeited after six years if the performance criteria are not met. No phantom units vest prior to the dates indicated below for each tranche. The DERs vest over time (with performance accelerators) and terminate with the vesting or forfeiture of the related phantom units. The following awards were outstanding under the 2005 LTIP at March 31, 2005.

				Phantom Units						DERs
Annualized Distribution Rate
		Date		A(1)		B(2)		Total		A(1)		B(2)		Total
$2.60		May 2007		549		150		699		353		150		503
$2.70		May 2008		—		—		—		132		75		207
$2.80		May 2009		411		150		561		132		75		207
$2.90		May 2010		—		—		—		132		100		232
$3.00		May 2010		411		200		611		132		100		232
				1,371		500		1,871		881		500		1,381

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⁽¹⁾

Awards that vest over six years. Achievement of the indicated distribution rate performance criteria can accelerate the vesting to the date indicated. The phantom unit awards are common stock equivalents and are included in our dilutive earnings per unit calculation.

⁽²⁾

Awards that vest only upon the achievement of the distribution rate performance criteria and the date indicated. In addition, the awards will be forfeited if the performance criteria are not met in six years. These awards are not common stock equivalents and are not included in our dilutive earnings per unit calculation.

        Compensation expense is recognized ratably over time for the phantom units and DERs that vest based on the passage of time. To the extent that the vesting of the awards or DERs is accelerated, the

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related compensation expense will also be accelerated. For those phantom units and DERs that vest upon the achievement of performance criteria, expense is recognized when it is considered probable the criteria will be achieved.

        In addition to the phantom units discussed above, four of our non-employee directors each have received LTIP awards of 5,000 units in the aggregate. These awards vest yearly in 25% increments (1,250 units). The awards have an automatic re-grant feature such that as they vest, a similar amount is granted. For the other two non-employee directors, any director compensation is assigned to the entity that designated them as directors. In those cases, no LTIP award was granted, but a cash payment is made.

        We have concluded that it is probable that we will achieve a $2.60 annualized distribution rate and therefore have accelerated the vesting of the portion of the awards that vest based on that rate. We recognized total compensation expense of approximately $2.2 million in the first quarter of 2005 related to the awards granted under our 1998 LTIP and our 2005 LTIP.

Long-term Incentive Plans.   The majority of phantom unit grants outstanding under our 1998 and 2005 Long-Term Incentive Plans contain vesting criteria that are based on a combination of performance benchmarks and service period.  The phantom units under the 2005 plan generally vest on the later of 2 years, 4 years or 5 years, or achievement of annualized distribution levels of $2.60, $2.80 and $3.00 per unit, respectively, and the majority of the phantom units have a final service period vesting in 2011. Accordingly, guidance includes 1) for phantom units tied to the $2.60 performance level, an accrual over the corresponding service period, generally 2 years, as it has been deemed probable that the $2.60 performance level will be reached, and 2) for the phantom units that are not tied to the $2.60 performance threshold but have a final service period vesting in 2011, a pro rata accrual associated with a six-year service period.  For 2005, the guidance includes approximately $18.4 million of principally non-cash expense associated with these phantom units. The actual amount of LTIP expense amortization in any given year will be directly influenced by fluctuations in our unit price and the amount of amortization in the early years and will also be increased if a determination is made that achievement of any of the remaining performance thresholds is probable.

11.         

Note 10—Long-Term Incentive Plans

        Our general partner has adopted the Plains All American GP LLC 1998 Long-Term Incentive Plan (the "1998 LTIP") for employees and directors of our general partner and its affiliates who perform services for us. Awards contemplated by the 1998 LTIP include phantom units and unit options. The 1998 LTIP currently permits the grant of phantom units and unit options covering an aggregate of 1,425,000 common units. The plan is administered by the Compensation Committee of our general partner's board of directors. Our general partner's board of directors has the right to alter or amend the 1998 LTIP or any part of the plan from time to time, including, subject to any applicable NYSE listing requirements, increasing the number of common units with respect to which awards may be granted; provided, however, that no change in any outstanding grant may be made that would materially impair the rights of the participant without the consent of such participant.

        A phantom unit entitles the grantee to receive, upon the vesting of the phantom unit, a common unit (or cash equivalent, depending on the terms of the grant). As of December 31, 2004, aggregate outstanding grants of approximately 134,000 units have been made to employees, officers and directors of our general partner. The Compensation Committee may, in the future, make additional grants under

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the plan to employees and directors containing such terms as the Compensation Committee shall determine.

        Common units to be delivered upon the vesting of grants may be common units acquired by our general partner in the open market or in private transactions, common units already owned by our general partner, or any combination of the foregoing. Our general partner will be entitled to reimbursement by us for the cost incurred in acquiring common units and any other costs incurred in settling obligations under the 1998 LTIP. In addition, the Partnership may issue up to 975,000 new common units to satisfy delivery obligations under the grants, less any common units issued upon exercise of unit options under the plan (see below). If we issue new common units upon vesting of the phantom units, the total number of common units outstanding will increase. The Compensation Committee, in its discretion, may grant tandem distribution equivalent rights ("DERs") with respect to phantom units. A DER entitles the grantee to a cash payment, either while the award is outstanding or upon vesting, equal to any cash distributions paid on a unit while the award is outstanding. There are no tandem equivalent distribution rights outstanding at this time under the 1998 LTIP.

        Other than grants to directors, none of the phantom units vested until November 2003. Since that time, approximately 927,000 phantom units have vested. Including grants to directors, approximately 418,000 units have been purchased and delivered or issued in satisfaction of vesting, after payment of cash-equivalents and netting for taxes. Under generally accepted accounting principles, we are required to recognize expense when it is considered probable that phantom unit grants under our 1998 LTIP will vest. As a result, we recognized an expense of approximately $7.9 million and $28.8 million for the years ended December 31, 2004 and 2003, respectively.

        The issuance of the common units upon vesting of phantom units is primarily intended to serve as a means of incentive compensation for performance. Therefore, no consideration is paid to us by the plan participants upon vesting and delivery of the common units.

        Our 1998 LTIP currently permits the grant of options to purchase common units. No unit option grants have been made under the 1998 LTIP to date. However, the Compensation Committee may, in the future, make grants under the plan to employees and directors containing such terms as the committee shall determine, provided that unit options have an exercise price equal to the fair market value of the units on the date of grant.

        In January 2005, our unitholders approved the 2005 Long-Term Incentive Plan (the "2005 LTIP"). The 2005 LTIP provides for awards to our employees and directors. Awards contemplated by the 2005 LTIP include phantom units, restricted units, unit appreciation rights and unit options, as determined by the Compensation Committee (each an "Award"). Up to 3,000,000 units may be issued in satisfaction of Awards. Certain Awards may also include DERs in the discretion of the Compensation Committee. Our general partner will be entitled to reimbursement by us for any costs incurred in settling obligations under the 2005 LTIP. Certain of these Awards could be considered a common stock equivalent and thus be dilutive to our earnings per unit from the time of their date of grant. In February 2005, our Board of Directors and Compensation Committee approved grants of approximately 1,900,000 phantom units (a substantial number of which include DERs) under the 2005 LTIP.

        The issuance of the common units upon vesting of phantom units is primarily intended to serve as a means of incentive compensation for performance. Therefore, no consideration is paid to us by the plan participants upon vesting and delivery of the common units.

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Long-term Incentive Plans.   The majority of phantom unit grants outstanding under our 1998 and 2005 Long-Term Incentive Plans contain vesting criteria that are based on a combination of performance benchmarks and service period. The phantom units generally vest on the later of 2 years, 4 years or 5 years and achievement of annualized distribution levels of $2.60, $2.80 and $3.00 per unit, respectively, and the majority of the phantom units have a final service period vesting in 2011. Accordingly, for phantom units that have a final service period vesting in 2011, guidance includes the pro rata accrual associated with a six-year service period. For 2005, the guidance includes approximately $10.1 million of non-cash expense associated with these phantom units. The actual amount of LTIP expense amortization in any given year will be directly influenced by fluctuations in our unit price and the amount of amortization in the early years will also be increased if a determination is made that achievement of any of the performance thresholds is probable.

11.