PLAINS ALL AMERICAN PIPELINE, L.P. — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with the three months ended March 31, 2016. PAA owns and operates midstream energy infrastructure and logistics assets for crude oil, NGL, natural gas and refined products across the United States and Canada. Its segments are Transportation, Facilities, and Supply and Logistics. Dollar amounts below are in millions unless stated otherwise.
Financial and operating results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $6,667 | $4,111 |
| Operating income | $591 | $282 |
| Net income attributable to PAA | $444 | $202 |
| Basic / diluted net income per common unit | $0.59 / $0.58 | $0.07 / $0.07 |
| Net cash from operating activities | $816 | $635 |
| Capital expenditures: acquisition, expansion and maintenance | $1,258 / $307 / $59 | $85 / $370 / $47 |
| Adjusted EBITDA | $512 | $633 |
| Implied distributable cash flow (DCF) | $303 | $439 |
Revenue rose 62% and net income attributable to PAA more than doubled. The filing attributes the earnings increase to derivative gains and contributions from acquisitions and expansion projects, partly offset by weaker crude oil and NGL market conditions and intense competition. Reported revenue also reflects higher commodity prices and substantially higher Supply and Logistics activity; revenue growth should not be read as equivalent growth in underlying profitability.
Adjusted EBITDA fell 19%. Supply and Logistics segment adjusted EBITDA declined to $51 from $184 (down 72%); Transportation was $273 versus $281, while Facilities rose to $188 from $167. The filing’s reconciliation identifies a $289 gain from derivative activities net of inventory valuation adjustments in Q1 2017, compared with a $122 loss in Q1 2016; these selected items are excluded from adjusted EBITDA. Implied DCF declined 31% to $303, versus distributions of $399 used in the filing’s comparison, producing a $96 DCF shortage.
Interest expense increased to $129 from $112, primarily due to a higher weighted-average debt balance and lower capitalized interest. Income tax expense was $66 versus $19, largely reflecting higher income and derivative mark-to-market effects in Canadian operations. The filing does not provide a comparable consolidated operating-margin measure.
Balance sheet, liquidity and capital
At March 31, 2017, total debt was $11,220, down from $11,839 at year-end 2016; senior notes were $9,876 and short-term debt was $1,341. Cash was $38. PAA reported a $54 working-capital surplus and approximately $2.753 billion of total available liquidity, including credit-facility and commercial-paper capacity. It was in compliance with credit-agreement covenants. Operating cash flow benefited from lower derivative margin balances and seasonal inventory reductions.
PAA raised $1,664 in net proceeds from common-unit sales, issuing approximately 54.1 million units. The equity issuance helped fund the $1.217 billion Alpha Crude Connector acquisition. The quarterly common distribution was $0.55 per unit, unchanged from the prior two quarters but approximately 21% below the year-earlier level; the Q1 distribution was payable May 15, 2017. Series A preferred distributions were paid in additional units rather than cash.
Material changes, outlook and risks
In February, PAA acquired the 515-mile Alpha Crude Connector gathering system in the Northern Delaware Basin for approximately $1.217 billion and a propane marine terminal for approximately $41 million. It sold non-core assets for $161 million and recorded a $36 million gain on one sale. Approximately $490 million of assets were classified as held for sale; management expected relevant transactions to close in Q2 or early Q3, subject to customary conditions and regulatory approvals. PAA’s 2017 expansion-capital plan was approximately $900 million. A 50/50 joint venture acquired the Advantage Pipeline after quarter-end, with PAA’s share approximately $66.5 million.
Management expected production to ramp up in the second half of 2017, potentially improving Transportation utilization and easing Supply and Logistics margin pressure. It cited rising Permian and STACK drilling activity, but cautioned that timing and results are uncertain. The filing gives no specific earnings or cash-flow guidance. Management warned that excess infrastructure capacity, competition, reduced production or volatility, lower prices, capital-market constraints, and unsuccessful acquisitions or projects could pressure results and returns.
The Line 901 crude oil release remains a significant contingency. PAA estimated total incident costs of approximately $280 million, with a remaining gross liability of $68 million at March 31, 2017, and a recognized insurance receivable of approximately $41 million. Cleanup was complete, but investigations, lawsuits, natural-resource claims, and potential fines or penalties remained unresolved; PAA warned that additional costs could exceed its estimates. Line 901 and Line 903 remained shut down with no restart timeline, and approximately $94 million of related assets remained on the books. Total environmental reserves, including Line 901, were $139 million. PAA also cited possible impairment or retirement costs for its Capline interest.
Important facts for investors to verify
- Whether Q1 derivative gains and other selected items obscure the trend in recurring segment earnings; compare GAAP results with adjusted EBITDA and DCF reconciliations.
- Whether operating cash flow and available liquidity can support distributions, capital spending, debt service and planned acquisitions, particularly given the $96 million DCF shortage.
- Progress and final economics of the Alpha Crude Connector acquisition, the Advantage joint venture, planned asset sales and the $900 million expansion-capital program.
- Developments in Line 901/903 investigations, litigation, insurance recoveries and potential penalties, and any effect on asset value or restart prospects.
- Whether the anticipated second-half production recovery materializes and improves pipeline utilization and Supply and Logistics margins despite competition and excess capacity.