PLAINS ALL AMERICAN PIPELINE LP annual report, FY2020

Business context and reporting period

Plains All American Pipeline, L.P. (PAA) filed this Form 10-K for the fiscal year ended December 31, 2020. It operates North American crude oil and NGL transportation, storage and processing infrastructure, plus supply and logistics activities, across three segments: Transportation, Facilities, and Supply and Logistics. The filing also reports fourth-quarter 2020 results.

Financial performance and liquidity

Fourth-quarter 2020 revenue was $5.963 billion, operating loss was $65 million and net loss was $25 million. Fourth-quarter gross margin was $5 million, as defined in the filing.

Year-end cash and cash equivalents were $22 million; available liquidity was approximately $2.179 billion, including available capacity under credit facilities and the commercial paper program. Working capital was negative $588 million. PAA reported covenant compliance at year-end. Its stated long-term financial targets include debt-to-Adjusted EBITDA averaging 3.0x–3.5x and interest coverage of about 3.3x or better; the filing does not provide a comparable actual leverage multiple in the summarized data.

Material changes versus the prior year

• Revenue fell 31% and Adjusted EBITDA declined 21%; transportation volumes were down 8% and Supply and Logistics segment Adjusted EBITDA fell 74%.
• PAA recorded $2.515 billion of goodwill impairment, eliminating the entire goodwill balance, and approximately $914 million of other non-cash impairment charges. It also recorded $233 million of inventory valuation adjustments.
• Transportation segment Adjusted EBITDA decreased 6% to $1.616 billion; Facilities increased 4% to $731 million; Supply and Logistics declined 74% to $210 million.
• Operating cash flow fell by $990 million. Free cash flow after distributions remained negative, at $(430) million.
• Common-unit distributions were reduced 50% from the February 2020 rate. Distributions declared per common unit for 2020 totaled $0.90, versus $1.38 in 2019. PAA also repurchased $50 million of common units during 2020.

Outlook, management commentary and risks

Management attributed the difficult year primarily to the COVID-19 demand shock, lower production and pipeline throughput, compressed regional differentials, and weaker NGL margins. It said 2021 drilling activity was expected to remain below pre-pandemic levels and excess pipeline capacity could make business conditions more challenging than in 2020. Management expects global oil demand to recover to or near pre-COVID levels by year-end 2021, but noted substantial uncertainty.

PAA cut its 2020/2021 capital program by $950 million, or 41%, and set a 2021 investment-capital plan of approximately $425 million. It also cited cost reductions, asset sales and balance-sheet strengthening as priorities. 2020 asset-sale proceeds were $451 million. Management cautioned that planned future divestitures and other actions are not assured.

Key risks include prolonged pandemic effects, lower producer activity and volumes, infrastructure overcapacity and contract-renewal pressure, customer/counterparty credit deterioration, access to capital and investment-grade ratings, commodity and derivative-market volatility, and environmental, safety, regulatory, climate, cybersecurity and weather exposures. Moody’s had downgraded PAA below investment grade; S&P and Fitch were identified as investment-grade raters.

Notable contingencies include the 2015 Line 901 spill in California: PAA estimated aggregate costs of approximately $460 million, reported a remaining gross liability of $86 million at year-end, and disclosed unresolved civil, derivative and other claims. Separately, Canadian tax authorities had asserted approximately $91 million of assessments, penalties and interest concerning transfer pricing; PAA disputed the assessments and had remitted approximately $64 million pending its challenge. The filing states no off-balance-sheet arrangements.

Important facts for investors to verify

• Whether volumes, contract renewals and regional pipeline utilization recover as management expects, particularly given excess capacity and subdued producer capital spending.
• Actual leverage, borrowing availability and covenant headroom relative to PAA’s stated targets, including the effect of working-capital and hedged-inventory borrowing.
• Whether the reduced distribution and 2021 capital plan generate sustainable positive free cash flow after distributions and support further deleveraging.
• Potential further impairments or changes to asset cash-flow assumptions, and the outcomes and cash costs of the Line 901 matters and Canadian tax reassessments.
• Execution and proceeds from planned asset sales, and the status, timing and economics of remaining major joint-venture projects.