Plains All American Pipeline, L.P. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. PAA owns and operates crude oil, NGL and natural gas transportation, storage, terminal and logistics infrastructure in the United States and Canada.
Financial and operating performance
- Q2 revenue: $8.08 billion, up 33% from $6.08 billion. Six-month revenue was $16.48 billion, up 29% from $12.75 billion. Revenue growth largely reflects higher commodity prices and activity in Supply and Logistics; revenue includes substantial product purchase and resale flows.
- Profit: Q2 net income attributable to PAA was $100 million versus $188 million; six-month net income was $388 million versus $632 million. Basic and diluted earnings per common unit were $0.07 for Q2 and $0.39 for six months, compared with $0.21 and $0.78, respectively, in 2017.
- Operating income and margins: Q2 operating income fell to $88 million from $257 million; six-month operating income was $469 million versus $848 million. These GAAP results include volatile derivative marks and asset-sale gains. PAA reported Q2 adjusted EBITDA of $506 million, up 12%, and six-month adjusted EBITDA of $1.098 billion, up 14%. The filing does not provide a directly comparable consolidated GAAP operating-margin measure.
- Key earnings driver: Q2 and six-month results included net losses from derivative activities, net of inventory valuation adjustments, of $240 million and $216 million, respectively, versus gains of $13 million and $302 million in 2017. Management cited a $511 million adverse year-over-year impact from the change in derivative mark-to-market results over the first half.
- Cash flow and distributions: Six-month operating cash flow was $1.015 billion, down from $1.461 billion; investing cash use was $506 million, versus $1.654 billion, and financing cash use was $509 million, versus $192 million provided in 2017. Six-month implied DCF was $773 million, up 31%; implied DCF available to common unitholders was $711 million after preferred distributions, up 20%. Common cash distributions were $435 million for the first half. The declared quarterly common distribution was $0.30 per unit, unchanged sequentially but about 45% below the year-earlier rate.
- Segments: Q2 adjusted EBITDA was $360 million in Transportation (up 21%), $171 million in Facilities (down 5%), and a $26 million loss in Supply and Logistics (versus a $28 million loss). Transportation gains were led by Permian Basin volumes and expansion projects. Six-month segment adjusted EBITDA was $695 million, $357 million and $45 million, respectively.
Balance sheet, liquidity and investment
- At June 30, total debt was $9.91 billion, broadly unchanged from $9.92 billion at year-end 2017; cash was $34 million. Short-term debt rose to $943 million from $737 million, while long-term debt was $8.97 billion. Senior notes were $8.94 billion.
- PAA reported a $1.3 billion working-capital deficit and total available liquidity of $3.03 billion, including $34 million cash. Management said it expected the deficit to decrease and considered liquidity adequate, subject to continued covenant compliance. PAA was in compliance at quarter-end. A $1.0 billion 364-day revolving facility was scheduled to mature in mid-August 2018.
- First-half expansion capital was $832 million; maintenance capital was $108 million. Full-year 2018 expansion capital was forecast at approximately $1.95 billion, primarily for Permian Basin projects. PAA targeted $700 million of 2018 divestitures and had received $426 million by June 30.
- Asset-sale proceeds were $426 million in the first half. PAA recorded an approximately $81 million net gain on asset sales, reflected in depreciation and amortization; this helped reduce reported D&A to $49 million in Q2 from $129 million.
Management commentary, outlook and material risks
- Management attributed stronger Transportation results mainly to higher Permian production, volumes and completed expansions. Supply and Logistics performance remained sensitive to competition, market structure, commodity differentials and derivative accounting volatility.
- Management increased and accelerated parts of the 2018–2019 expansion program in response to Permian infrastructure demand. Steel tariffs contributed to higher Cactus II project costs. No specific full-year earnings or DCF guidance is provided in the filing.
- Line 901 incident: The company estimated aggregate costs incurred or expected at approximately $335 million, with a remaining gross liability of $76 million at June 30. It had collected $180 million of approximately $220 million of costs believed recoverable from insurance. Criminal charges, claims, lawsuits and governmental investigations remained outstanding; further costs, fines or penalties could exceed estimates. Line 901 and most of Line 903 remained out of service, with no restart timeline established.
- Environmental liabilities, including Line 901, totaled $138 million at quarter-end, with $49 million of recorded probable insurance or third-party recovery receivables. PAA cautioned that actual remediation and legal costs may exceed reserves.
- FERC’s revised tax-allowance policy did not directly affect PAA’s current cost-of-service rates, which are grandfathered or negotiated. Management noted potential future pressure on index-based tariff increases from July 2021 onward, depending on FERC’s treatment of its oil pipeline index.
- Other material exposures include commodity, interest-rate and Canadian-dollar movements; counterparty and credit risk; project execution, permitting, labor and material costs; asset-sale execution; and changes in shipped volumes, competition and market conditions.
Most important facts for investors to verify
- Whether operating cash flow, adjusted EBITDA and DCF sustain the elevated 2018 expansion program and distributions, and how much depends on asset sales.
- The subsequent status and refinancing of the $1.0 billion revolving facility due in mid-August 2018, and liquidity after that maturity.
- How much of the reported earnings decline reflects derivative mark-to-market volatility versus underlying segment performance.
- Progress, costs, penalties, insurance recoveries and any restart decisions relating to Line 901/903, including whether reserves remain adequate.
- Actual 2018 expansion spending, project cost changes (including Cactus II), and completion of the $700 million divestiture target.
- Future common and preferred distributions, especially given the common distribution reduction and the shift to cash payments for Series A preferred distributions.