Plains All American Pipeline, L.P. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a quarterly filing; fourth-quarter figures are included where available. PAA operates crude oil, NGL and natural gas transportation, storage, facilities and supply-and-logistics businesses in the United States and Canada.
Financial performance and position
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $26.223 billion | $20.182 billion | Up 30% |
| Operating income | $1.153 billion | $994 million | Up 16% |
| Net income attributable to PAA | $856 million | $726 million | Up 18% |
| Basic / diluted net income per common unit | $0.96 / $0.95 | $0.43 / $0.43 | Higher |
| Adjusted EBITDA | $2.082 billion | $2.169 billion | Down 4% |
| Net cash from operating activities | $2.499 billion | $733 million | Higher |
| Net cash used in investing activities | $1.570 billion | $1.273 billion | Greater use |
Revenue growth primarily reflects higher crude oil prices and volumes in Supply and Logistics; revenue is a high-volume, low-margin measure and should not be read as equivalent to earnings growth. Segment adjusted EBITDA was $1.287 billion for Transportation (up 13%), $734 million for Facilities (up 10%), and $60 million for Supply and Logistics (down 83%). Management reported continued margin compression and reduced arbitrage opportunities in the latter segment.
Operating income margin was approximately 4.4% and net income attributable to PAA was approximately 3.3% of revenue, calculated from reported figures. PAA did not present these as its principal performance measures. Adjusted EBITDA per barrel was $0.68 for Transportation, $0.47 for Facilities and $0.13 for Supply and Logistics.
Implied distributable cash flow (DCF) was $1.312 billion; after preferred distributions, implied DCF available to common unitholders was $1.307 billion, versus $1.386 billion of common-unit cash distributions paid, a reported $79 million shortfall. These are non-GAAP measures defined by PAA.
- Fourth quarter: Revenue was $7.605 billion, operating income $261 million, net income attributable to PAA $191 million, and basic/diluted earnings per common unit $0.19. The comparable 2016-quarter values were $5.952 billion, $218 million, $126 million and $0.14, respectively. The declared distribution was $0.30 per unit, versus $0.55 a year earlier.
- Cash flow and investment: 2017 capital expenditures were $1.323 billion for acquisitions, $1.135 billion for expansion and $247 million for maintenance. Operating cash flow rose substantially, aided by reductions in crude oil inventory and hedging margin balances that had been funded with short-term debt.
- Debt and liquidity: Year-end total debt was $9.920 billion on the balance sheet; the filing also reports approximately $10.0 billion face-value consolidated debt. Long-term debt was $9.183 billion. Available liquidity was approximately $2.960 billion, including $37 million cash, despite a $531 million working-capital deficit. PAA reported compliance with credit covenants at year-end.
- Other balance-sheet measures: Total assets were $25.351 billion; partners’ capital was $10.958 billion. The company had approximately $14.089 billion of net property and equipment and $2.756 billion of investments in unconsolidated entities.
Material changes versus the prior period
- Common-unit distributions were reduced under the August 2017 Leverage Reduction Plan: the annualized rate reset to $1.20 per unit beginning with the third-quarter 2017 distribution, from the prior higher level. The December-quarter distribution was $0.30 per unit.
- PAA raised $1.664 billion net through common-unit issuances and $788 million net through an $800 million Series B preferred-unit offering. It also completed approximately $1.083 billion of asset sales and reduced hedged-inventory debt by about $375 million from June 2017 levels.
- PAA acquired the Alpha Crude Connector gathering system for approximately $1.215 billion. The acquisition and expansion projects contributed to higher transportation volumes, particularly in the Permian Basin. Total Transportation tariff volumes increased 12% to 5.083 million barrels per day.
- Supply and Logistics adjusted EBITDA fell from $359 million to $60 million, while aggregate adjusted EBITDA declined despite higher reported net income. Results included differing derivative and inventory valuation effects between years.
- Depreciation and amortization rose to $626 million from $494 million, including $152 million of non-cash charges related to impairment and accelerated depreciation of rail and terminal assets, compared with $80 million in 2016. Net interest expense increased to $510 million from $467 million.
- Total debt fell from $11.839 billion at year-end 2016 to $9.920 billion at year-end 2017. PAA repaid or redeemed $1.350 billion of senior notes during 2017, including $950 million redeemed early in December; the early redemptions generated a $40 million loss.
Outlook, commentary, risks and unusual items
- Management described the long-term outlook as favorable, particularly for Permian Basin production and fee-based infrastructure, but acknowledged that weak MLP capital markets, excess midstream capacity, compressed differentials and below-target distribution coverage had challenged results and elevated leverage.
- PAA targeted approximately $1.4 billion of 2018 expansion capital, primarily for Permian takeaway pipelines and related projects. Major Permian projects were expected to enter service in 2019; management said the 2018 program would contribute minimally to 2018 results. The filing does not provide formal earnings or cash-flow guidance.
- The Leverage Reduction Plan targets about $1.4 billion of debt reduction from mid-2017 levels through March 31, 2019. Management said it expected to meet the target and return leverage toward its target range, but cautioned that execution and timing are not assured. Its stated long-term debt-to-adjusted-EBITDA target is 3.5x–4.0x; management expected the ratio to remain above target in the near term.
- Moody’s downgraded PAA’s senior unsecured debt below investment grade in August 2017; S&P and Fitch remained investment grade at the time described. Further downgrades could increase funding costs, constrain borrowing and reduce supplier or counterparty credit.
- The 2015 Line 901 California oil release remains a significant contingency. PAA estimated total incident costs of approximately $335 million, with a remaining gross liability of $94 million at year-end and approximately $47 million of additional probable insurance recoveries recorded as a receivable. Criminal, regulatory and civil matters remained pending; actual costs could exceed the estimate. Lines 901 and most of 903 remained out of service, with no restart timeline established.
- Other significant risks include pipeline and facility incidents, environmental liabilities, regulation and integrity-program costs, competition and overbuilt capacity, customer and counterparty credit, commodity-market structure, capital-market access, interest and currency exposure, and project permitting or construction delays. The company reported $152 million in 2017 impairment/accelerated-depreciation charges and $35 million in inventory valuation charges.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management and the auditor concluded internal control was effective as of year-end.
Most important facts for investors to verify
- Progress toward the $1.4 billion deleveraging objective and the targeted leverage range, including any subsequent asset sales or financing.
- Whether the $1.20 annualized common distribution is adequately covered by recurring cash flow after preferred distributions and maintenance capital.
- Permian project costs, shipper commitments, joint-venture funding shares and expected in-service dates, particularly for Cactus II and Sunrise expansions.
- Supply and Logistics recovery prospects and the extent to which 2017 earnings and operating cash flow depended on derivative marks, inventory movements and working-capital changes.
- Updates to Line 901/903 liabilities, insurance recoveries, legal proceedings, pipeline restart plans and other environmental contingencies.
- Credit-rating changes, covenant headroom, refinancing needs and the cash-distribution obligations of Series A and Series B preferred units.