Plains All American Pipeline, L.P. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited results. PAA operates midstream transportation, facilities, and supply-and-logistics businesses for crude oil, NGL, natural gas, and refined products in the United States and Canada. Financial amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $6,663 | $11,195 | $12,605 | $22,878 |
| Operating income | $209 | $365 | $578 | $857 |
| Net income attributable to PAA | $124 | $287 | $407 | $671 |
| Net income/(loss) per limited partner unit | $(0.06) | $0.45 | $0.29 | $1.19 basic |
| Adjusted EBITDA | $486 | $512 | $1,108 | $1,079 |
| Implied distributable cash flow (DCF) | $306 | $367 | $749 | $776 |
Q2 2015 net income attributable to PAA was allocated heavily to the general partner’s incentive distribution rights; limited partners recorded a loss of $22 million, or $0.06 per unit. Revenue fell sharply largely because lower commodity prices reduced the dollar value of Supply and Logistics purchases and sales; those revenues are high-volume, generally low-margin activities. Adjusted EBITDA was down 5% for the quarter but up 3% for the first half, reflecting management’s adjustments for selected comparability items.
- Segment profit: Q2 Transportation $186 (down 16%), Facilities $144 (up 7%), and Supply and Logistics $41 (down 69%). First-half totals were $428, $285, and $171, respectively.
- Margins and costs: Reported operating income was $209 in Q2 and $578 in the first half. Field operating costs included a net $65 charge for the Line 901 incident. A consolidated operating margin percentage is not stated in the filing.
- Cash flow: First-half operating cash flow was $660, versus $963 in 2014. Investing cash use was $1,343, including $1,188 of expansion capital, $102 of maintenance capital, and $64 for acquisitions. Financing provided $309.
- Capital returns: First-half distributions paid to limited partners and the general partner totaled $810. Implied DCF was below distributions paid by $122 for Q2 and $99 for the first half; the filing says shortages are funded from reserves, cash, or borrowings. The declared quarterly distribution was $0.695 per unit, payable August 14, 2015.
- Balance sheet and debt: At June 30, cash was $28; total debt was $10,052, compared with $10,049 at year-end 2014. Current liabilities exceeded current assets by $530. Partners’ capital totaled $8,705.
- Liquidity: Management reported approximately $3.08 billion of available liquidity, including credit-facility and commercial-paper capacity. PAA was in compliance with debt covenants at quarter-end.
Changes versus prior comparable periods
- Q2 revenue declined 40% and first-half revenue declined 45%; PAA-attributable net income fell 57% and 39%, respectively. Higher depreciation and interest expense also weighed on earnings as the asset base and associated financing grew.
- Supply and Logistics profit weakened amid compressed crude-oil differentials and less favorable trading opportunities. Average WTI prices were $49–$61 per barrel in Q2 2015 versus $99–$108 in Q2 2014.
- Transportation throughput rose 15% in Q2, supported by system expansions and production-related volumes, but segment profit declined, including from Line 901-related costs and lower loss-allowance revenue. First-half Transportation profit was approximately flat.
- Adjusted EBITDA and DCF comparisons were affected by derivative and inventory valuation items, long-term inventory costing, equity-indexed compensation, foreign-exchange effects, and the Line 901 incident. These are non-GAAP measures; assess them alongside GAAP results.
Outlook, risks, contingencies, and unusual items
- Capital plan: Management projected 2015 expansion capital of $2.1–$2.3 billion and maintenance capital of $205–$225 million. Projects include Permian Basin, Fort Saskatchewan, rail terminals, Cactus, Saddlehorn, and other pipelines and facilities. Management expected most project contributions to benefit 2016 and later.
- Market outlook: Management cautioned that lower oil prices and producer spending reductions could slow production growth, reduce volumes and margins, and slow cash-flow and distribution growth. Increased infrastructure competition, asset underutilization, and difficult capital markets were also identified as risks. No specific earnings or DCF guidance is provided in the supplied filing text.
- Line 901 spill: A May 2015 crude-oil release near Refugio State Beach, California, led to shutdown of Lines 901 and 903, cleanup, regulatory orders, investigations, and lawsuits. PAA’s worst-case volume estimate was approximately 2,400 barrels but remained under review. The company estimated total incident costs of approximately $257 million, accrued a remaining gross liability of $221 million, and recorded a $192 million insurance recovery receivable. The estimate excludes lost revenue from the pipeline shutdown and may change; fines, penalties, claims, and legal costs remain uncertain. Line 901 had no restart timeline established.
- Other contingencies: Total environmental reserves were $297 million at quarter-end, with $200 million of related recovery receivables recorded. A July 10, 2015 release of about 100 barrels near the Illinois-Missouri border was estimated to cost less than $10 million; a corrective-action order and a class action followed. Other disclosed matters include pipeline and facility regulatory actions and environmental remediation.
- Debt and financing: PAA repaid $150 million of 5.25% notes in June and expected to repay $400 million of 3.95% notes maturing in September 2015 using commercial-paper borrowings. A March equity offering of 21 million units generated approximately $1.1 billion net proceeds; common units outstanding increased to 397.7 million at June 30.
- Risk management: PAA uses commodity, interest-rate, and currency derivatives. Derivative valuations and future reclassifications can affect earnings and AOCI; certain Level 3 fair values rely on broker price estimates and management judgments.
Important facts for investors to verify
- Progress on Line 901 cleanup, investigations, claims, insurance recovery, final spill-volume estimate, costs, penalties, and restart prospects for Lines 901 and 903.
- Whether reported liquidity remains available and how the September 2015 note maturity and ongoing capital program are funded.
- Distribution coverage and funding: first-half implied DCF was $749 million versus $848 million of distributions shown as paid or pertaining to the period.
- Execution, timing, cost, and expected returns of the $2.1–$2.3 billion expansion-capital plan amid weaker oil markets and producer spending reductions.
- Underlying operating performance excluding derivative/inventory valuation effects and other management-defined comparability items; review the non-GAAP reconciliations against GAAP results.