Business context and reporting period
Plains All American Pipeline, L.P. (PAA) owns and operates crude oil, NGL and natural gas midstream infrastructure in the U.S. and Canada. Its segments are Transportation, Facilities, and Supply and Logistics. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020. Unless stated otherwise, dollar amounts are in millions.
Financial results and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $3,225 | $8,253 | $11,494 | $16,628 |
| Operating income/(loss) | $210 | $451 | $(2,563) | $1,165 |
| Net income/(loss) attributable to PAA | $142 | $446 | $(2,705) | $1,416 |
| Basic net income/(loss) per common unit | $0.13 | $0.54 | $(3.85) | $1.80 |
| Segment Adjusted EBITDA | $523 | $782 | $1,316 | $1,643 |
| Adjusted EBITDA (non-GAAP) | $524 | $784 | $1,319 | $1,646 |
Q2 revenue fell 61% year over year, largely reflecting lower Supply and Logistics activity and commodity-linked sales. Segment Adjusted EBITDA declined 33% in Q2 and 20% for the first half. Supply and Logistics segment Adjusted EBITDA was $3 million in Q2 versus $200 million a year earlier; Transportation was $346 million versus $410 million, while Facilities was $174 million versus $172 million. The filing does not provide a comparable consolidated operating-margin percentage.
- Cash flow: First-half cash from operations was $974, down from $1,464. Investing activities used $858. Free cash flow, as defined by PAA, was $122; free cash flow after distributions was negative $370.
- Liquidity: June 30 cash and cash equivalents were $40, plus $64 of restricted cash. PAA reported a $472 working-capital deficit but $2,928 of total liquidity, including available facility capacity. It said it was covenant-compliant.
- Debt: Total debt was $10,122 at June 30 versus $9,691 at year-end 2019. In June, PAA issued $750 of 3.80% senior notes due 2030; proceeds were intended partly to repay 5.00% notes due February 2021.
- Distributions and capital: The common-unit distribution was reduced 50% from $0.36 to $0.18 quarterly per unit, effective with the May payment; the August payment was also $0.18. First-half common distributions paid were $393. PAA spent $654 on expansion capital in the first half and targeted approximately $1.0 billion for full-year 2020 expansion capital.
Material changes versus the prior comparable period
- The first-half net loss was driven principally by a $2,515 goodwill impairment, which eliminated all reported goodwill. PAA also recorded $446 of impairment losses on pipeline and other long-lived assets, $167 on assets classified as held for sale, and $232 of inventory valuation adjustments. These items substantially affected reported earnings.
- COVID-19-related demand weakness, excess crude supply, lower producer activity and price volatility contributed to lower volumes and weaker commercial results. Q2 Transportation crude oil pipeline volumes fell 13%; Supply and Logistics NGL sales volumes fell 41%.
- First-half interest expense rose to $215 from $203. Depreciation and amortization increased to $333 from $283, primarily from completed expansion projects and changes to certain asset useful lives.
- PAA acquired Delaware Basin crude oil gathering assets for approximately $300, sold a 10% interest in Saddlehorn for approximately $78, and sold certain NGL terminals for approximately $163. A separate sale of Los Angeles Basin terminals for $195, subject to adjustments, remained pending at filing time.
Outlook, risks, contingencies and unusual items
- Management said market conditions remained uncertain and could negatively affect PAA relative to pre-pandemic levels, with impacts in 2021 potentially more pronounced than in 2020. Risks cited include a slow demand recovery, a resurgence of COVID-19, high inventories, lower drilling activity, producer shut-ins, regulatory changes, geopolitical developments and counterparty credit or performance issues.
- PAA reduced its 2020/2021 capital program by $850, or 37%, to approximately $1.45 billion, and reduced common-unit distributions by 50%. It cautioned that further actions might be necessary and that asset sales, cost reductions or additional capital reductions were not assured.
- For the 2015 Line 901 oil release, PAA estimated aggregate costs incurred or expected of approximately $455. At June 30, the remaining gross liability was $140; PAA had recognized a $118 insurance receivable for costs considered probable of recovery. A proposed Consent Decree would require $24 in civil penalties and $22.325 for natural-resource damages, subject to court approval. Remaining claims and litigation could increase costs beyond recorded estimates.
- Management reported no material COVID-19-related operating constraints or significant incremental operating costs to date. It warned that extended financial-market disruption or energy-price volatility could adversely affect financial condition, results and cash flows.
Most important facts for investors to verify
- Whether cash generation and facility availability remain adequate as energy demand, production volumes and customer credit conditions evolve.
- Execution of the reduced capital plan, the pending Los Angeles Basin asset sale, and management’s intended refinancing of the February 2021 notes.
- Whether minimum-volume commitments, contract deficiencies and the expected recovery of previously shut-in production support future transportation results.
- The adequacy of the Line 901 liability and insurance-recovery estimates, and court approval and implementation of the proposed Consent Decree.
- The size and timing of further impairments, asset-sale proceeds, and any additional changes to distributions or capital spending.