Plains All American Pipeline, L.P. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. PAA owns and operates midstream energy infrastructure and logistics businesses in the United States and Canada across Transportation, Facilities, and Supply and Logistics.
Financial performance
- Second quarter: Revenue was $4.95 billion, down 26% from $6.66 billion. Operating income was $146 million versus $211 million; net income attributable to PAA was $101 million versus $124 million. Common-unit net loss was $0.20 per unit versus a loss of $0.06.
- First six months: Revenue was $9.06 billion, down 28% from $12.61 billion. Operating income was $427 million versus $583 million; net income attributable to PAA was $302 million versus $407 million. Common-unit net loss was $0.13 per unit versus income of $0.29. Preferred distributions and partnership income-allocation rules affected income allocated to common units.
- Segment profit: Q2 Transportation was $252 million (up 35%) and Facilities $156 million (up 8%); Supply and Logistics recorded an $18 million loss, versus $41 million profit a year earlier. For the first half, segment profit was $499 million, $315 million, and $19 million, respectively. Lower Supply and Logistics results reflected weaker market conditions, lower lease-gathering margins and derivative mark-to-market losses.
- Cash flow and investment: First-half operating cash flow was $387 million, down from $660 million. Investing cash outflow was $522 million versus $1.34 billion, including $699 million of property and other additions and $85 million of acquisition payments, partly offset by $391 million of asset-sale proceeds. Financing cash flow was $138 million. Management reported $875 million of acquisition, expansion and maintenance capital expenditures combined.
- Debt and liquidity: Total debt was $10.79 billion at June 30, down from $11.37 billion at year-end 2015. Cash was $34 million; working capital deficit was $426 million. PAA reported approximately $2.91 billion of available liquidity and compliance with credit-facility and indenture covenants. Senior notes of $175 million mature in August 2016 and $400 million in January 2017; PAA said it intended to repay them using commercial paper or credit facilities.
- Distributions and funding: Common-unit distributions remained $0.70 per quarter through the distribution declared in July. PAA raised approximately $1.6 billion net through a January Series A preferred-unit placement; the preferred units carry cumulative distributions of $2.10 annually per unit, which could be paid in additional units through 2017. First-half cash distributions to common unitholders and the general partner totaled $866 million.
Material changes, outlook and risks
- Revenue fell substantially, largely reflecting lower commodity prices and lower Supply and Logistics activity. Adjusted EBITDA was $461 million for Q2, down 5%, and $1.08 billion for the first half, down 2%. Implied distributable cash flow was $314 million for Q2 and $754 million for the first half, below corresponding distributions by $119 million and $112 million, respectively.
- Depreciation and amortization rose to $204 million in Q2 from $108 million, including approximately $80 million of non-cash impairments on rail and terminal assets and an $18 million write-off of assets taken out of service. These charges were partly offset by gains on non-core asset sales. Interest expense also increased.
- Management described lower North American production, compressed basis differentials, excess midstream capacity and increased competition as pressures on volumes and margins, especially in Supply and Logistics. It cautioned that distribution and cash-flow growth may be slower and that expansion projects may not earn targeted returns. 2016 expansion capital was projected at $1.35–$1.50 billion; maintenance capital at $180–$200 million.
- PAA announced a July 11 simplification agreement, expected to close in Q4 2016, subject to customary conditions. PAA would issue approximately 245.5 million common units and assume about $593 million of AAP debt in exchange for AAP contributing the incentive distribution rights and converting the 2% economic general partner interest to a non-economic interest. PAA intended to reduce the common-unit distribution to $0.55 per quarter beginning with the third-quarter distribution.
- Line 901 incident: The 2015 California crude-oil release remains a major contingency. Lines 901 and 903 were shut down and had no restart timetable. PAA estimated total incident costs at approximately $269 million and reported a remaining gross liability of $91 million, with $62 million of insurance receivable recognized. Criminal, regulatory, civil and securities-related proceedings remained ongoing; PAA warned costs could materially exceed its estimate. The environmental reserve, including Line 901, was $160 million.
- Other risks include commodity and interest-rate movements, Canadian-dollar exposure, counterparty credit, capital-market access, weather and environmental liabilities. PAA reported no material off-balance-sheet arrangements and said disclosure controls were effective.
Important facts for investors to verify
- Progress, cost exposure, insurance recoveries and potential penalties or claims related to Line 901, and any approved restart plans for Lines 901 and 903.
- Completion and final terms of the simplification, including the additional units and assumed debt, and the planned reduction in common-unit distributions.
- Liquidity, covenant compliance and refinancing of the 2016 and 2017 senior-note maturities, particularly given the working capital deficit and first-half DCF shortfall.
- Whether operating volumes and Supply and Logistics margins recover amid production declines, excess capacity and weak market conditions, and whether planned capital projects achieve expected returns.