Plains All American Pipeline, L.P. — 2018 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The partnership owns and operates crude oil, NGL and natural gas transportation, storage, terminal and logistics assets in the United States and Canada. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $8,792 | $5,873 | $25,269 | $18,618 |
| Operating income | $493 | $44 | $962 | $892 |
| Net income attributable to PAA | $710 | $33 | $1,099 | $665 |
| Basic net income per common unit | $0.91 | $(0.01) | $1.30 | $0.77 |
| Adjusted EBITDA | $636 | $489 | $1,735 | $1,452 |
| Implied DCF available to common unitholders | $396 | $298 | $1,107 | $891 |
- Q3 revenue rose 50%; nine-month revenue rose 36%. Much of the increase reflected higher crude oil prices and greater Supply and Logistics activity; purchases and related costs also increased substantially. Revenue growth alone therefore does not represent comparable growth in margins.
- Q3 earnings included a $210 million gain from selling a 30% BridgeTex interest. The sale generated $868 million in proceeds; PAA retained a 20% interest. Nine-month results also benefited from higher Transportation performance, favorable crude differentials and lower interest expense.
- For the first nine months, segment Adjusted EBITDA was $1,083 million in Transportation (up 16%), $530 million in Facilities (down 4%) and $120 million in Supply and Logistics (versus a $32 million loss). Supply and Logistics’ reported GAAP results were affected by derivative mark-to-market movements.
- Operating cash flow was $1,294 million, down from $1,918 million. Investing cash outflow was $184 million, including $1,184 million of property and equipment additions and $1,298 million of asset-sale proceeds. Financing cash outflow was $1,115 million, including $653 million of common-unit distributions.
- Implied DCF available to common unitholders exceeded common cash distributions by $454 million for the nine-month period; Q3 excess was $178 million. These are non-GAAP measures defined by management.
Financial position, debt and liquidity
- At September 30, 2018, total debt was $9,569 million, compared with $9,920 million at year-end 2017. Cash was $29 million; senior notes were $8,939 million. Debt reduction reflected asset-sale proceeds and operating cash flow, among other factors.
- Working capital was negative $529 million. PAA reported total available liquidity of approximately $2,488 million, including credit-facility capacity, commercial-paper availability and cash. It was in compliance with debt covenants.
- In August, PAA extended the maturity of its revolving credit facility to August 2023 and its hedged inventory facility to August 2021. It also entered into two $100 million GO Zone term loans.
- Common-unit distributions remained $0.30 quarterly ($1.20 annualized). Series A preferred distributions were $0.525 per unit quarterly; Series B distributions were $30.625 per unit semiannually.
Outlook, significant items and risks
- Management expected full-year 2018 expansion capital spending of approximately $1.95 billion, primarily focused on Permian Basin projects. It reported $1.37 billion invested in midstream infrastructure during the first nine months.
- PAA received approximately $1.3 billion from asset sales in the first nine months, exceeding its $700 million 2018 divestiture target. It said excess proceeds were used to reduce debt and fund additional expansion opportunities; further sales were being pursued, with no assurance they would close.
- The 2015 Line 901 crude oil release remains a material contingency. PAA estimated total incident costs of approximately $335 million and a remaining gross liability of $65 million at September 30. It had collected $180 million of approximately $220 million in release costs it considered recoverable from insurers and recorded a further $40 million receivable. PAA warned actual costs could exceed its estimates.
- In September 2018, a jury found PAA guilty of one felony and eight misdemeanor counts related to Line 901; the company was evaluating post-trial options, including appeal. Other agency investigations and civil claims remained pending. PAA said it did not expect the fines or penalties resulting from the verdict to materially affect its financial position or operations.
- Lines 901 and most of Line 903 remained shut down; a portion of Line 903 remained in service under a pressure restriction. No restart timeline had been established.
- Management cited risks including commodity-market and differential changes, volume and production trends, project execution, financing access, counterparty credit, Canadian-dollar movements and environmental liabilities. A FERC policy change could potentially constrain future tariff escalations from July 2021, although PAA said its current FERC-regulated tariffs were grandfathered or negotiated.
Important facts for investors to verify
- How much of earnings and cash generation is supported by ongoing operations versus the BridgeTex sale gain, asset dispositions and derivative accounting effects.
- Whether projected 2018 expansion spending is completed on schedule and produces expected Permian volumes and returns, and whether planned divestitures close.
- Liquidity, debt and distribution coverage as working-capital needs, inventory levels, margin requirements and capital spending change.
- Any updates to Line 901 liabilities, insurance recoveries, legal proceedings, penalties and the operating status of Lines 901 and 903.
- The effect of future FERC index changes on pipeline tariff escalations, and the realized impact of commodity, interest-rate and foreign-exchange exposures.