PLAINS ALL AMERICAN PIPELINE LP annual report, FY2015

Plains All American Pipeline, L.P. — 2015 Form 10-K

Business context and reporting period. The filing covers the fiscal year ended December 31, 2015; quarterly figures below compare fourth-quarter 2015 with fourth-quarter 2014. PAA operates midstream crude oil, NGL, natural gas and refined-products infrastructure across the United States and Canada through Transportation, Facilities, and Supply and Logistics segments. Its business combines largely fee-based transportation and facilities services with commodity marketing and logistics.

Key financial metrics

2015 segment profit was $917 million for Transportation, $579 million for Facilities and $381 million for Supply and Logistics, versus $925 million, $584 million and $782 million, respectively, in 2014. Distribution coverage was approximately 88%; distributions paid exceeded implied DCF by $240 million. The partnership reported a $438 million working-capital deficit and $27 million of cash at year-end.

Fourth quarter: Revenue was $4.996 billion versus $9.459 billion in fourth-quarter 2014; net income attributable to PAA was $247 million versus $389 million. Basic net income per unit was $0.24 versus $0.67. The declared distribution was $0.70 per common unit versus $0.66 a year earlier.

Material changes versus prior periods

• Annual revenue fell 47% and net income attributable to PAA fell 35%. Management attributed the earnings decline mainly to weaker Supply and Logistics results, Line 901 incident costs and lost revenue, and higher depreciation and interest expense.
• Supply and Logistics segment profit declined 51% to $381 million, reflecting compressed crude oil differentials, increased competition and excess midstream capacity. Adjusted EBITDA declined only 1%, partly because adjustments exclude selected comparability items.
• Transportation volumes increased 9% to 4.453 million barrels per day, but segment profit was nearly flat. Facilities segment profit also remained nearly flat.
• WTI traded at approximately $35–$61 per barrel in 2015, versus $53–$107 in 2014. Inventory write-down charges were $117 million in 2015, compared with $289 million in 2014.
• Operating cash flow declined by $660 million. Expansion capital rose to $2.170 billion, while year-end debt increased by approximately $1.4 billion.

Outlook, commentary, risks and unusual items

• Management expected lower production growth, compressed differentials, excess takeaway capacity and competition to constrain volumes, margins, cash flow and distribution growth for several years. It warned that prolonged low prices, weak market volatility or difficult capital markets could further pressure results.
• PAA planned approximately $1.4–$1.6 billion of 2016 expansion capital and $190–$210 million of maintenance capital. Management expected limited contribution from these investments in 2016, with growth primarily in 2017 and beyond.
• In January 2016, after year-end, PAA raised approximately $1.6 billion net through a private placement of 61.0 million Series A convertible preferred units. The units carry an 8% annual distribution rate, rank senior to common units and are generally convertible after two years. Proceeds were intended for capital spending, debt repayment and general purposes.
• Management said long-term debt-to-adjusted EBITDA was expected to exceed its 3.5x–4.0x target range near term, with improvement dependent on industry recovery and growth from capital investments. Year-end debt was about $11.4 billion; liquidity was subject to continued covenant compliance. The partnership was compliant with its covenants at year-end.
• The May 2015 Line 901 spill near Santa Barbara, California, had a worst-case estimate of approximately 2,935 barrels. PAA estimated total costs of $269 million, with $83 million net of expected insurance recoveries reflected in 2015 results. At year-end, remaining gross liability was $116 million and a $155 million insurance receivable was recognized; an additional $69 million of insurance proceeds arrived in January 2016. Lines 901 and 903 remained shut down or restricted, with no restart timeline established. Claims, investigations and litigation remained unresolved, and costs could exceed estimates.
• Other notable exposures include the 2015 Pocahontas release (estimated costs under $10 million), pipeline-safety and air-permit proceedings, environmental liabilities, customer and counterparty credit risk, Canadian-dollar exposure, and the possibility of higher insurance, regulatory and integrity-management costs. PAA elected to self-insure hurricane-related property damage risk.

Important facts for investors to verify

• Review the latest status, restart prospects and total cost exposure for Lines 901 and 903, including insurance recoveries, claims, lawsuits, investigations and possible penalties.
• Check subsequent leverage, covenant headroom, refinancing needs and liquidity after the preferred-unit financing, capital spending and asset-sale agreements.
• Assess whether DCF can support common-unit distributions: 2015 coverage was approximately 88%, and distributions exceeded implied DCF by $240 million.
• Track crude oil production, pipeline utilization, contracted minimum volumes, basis differentials and Supply and Logistics margins as market conditions evolve.
• Verify execution, costs, shipper commitments and in-service timing for the 2016–2017 growth projects and expected returns on invested capital.
• Consider preferred-unit distribution priority, potential conversion and dilution, and the resulting effects on common-unit cash available and distribution growth.