Plains All American Pipeline, L.P. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; financial statements are unaudited. PAA owns and operates midstream energy infrastructure and logistics assets for crude oil, NGL, natural gas and refined products in the U.S. and Canada, across Transportation, Facilities, and Supply and Logistics segments. Amounts below are in millions of dollars except per-unit data.
Key financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $11,684 | $10,620 | +10% |
| Operating income | $493 | $655 | -25% |
| Net income attributable to PAA | $384 | $528 | -27% |
| Diluted net income per limited partner unit | $0.73 | $1.27 | -42% |
| Adjusted EBITDA (non-GAAP) | $567 | $739 | -23% |
| Implied distributable cash flow (non-GAAP) | $411 | $560 | -27% |
| Net cash provided by operating activities | $822 | $979 | -16% |
Operating margin was approximately 4.2% versus 6.2% in Q1 2013; net income attributable to PAA as a share of revenue was approximately 3.3% versus 5.0%. These ratios are calculated from reported figures. Revenue growth largely reflects higher commodity prices and volumes in Supply and Logistics, but did not translate into higher profit.
- Segment profit: Transportation $206, up 26%; Facilities $154, up 3%; Supply and Logistics $249, down 43%. Total segment profit fell 19% to $609.
- Cash use and investment: Investing cash outflow was $524, including $468 of additions to property, equipment and other assets. Reported Q1 capital expenditures were $609: $563 for internal growth and $46 for maintenance. Financing cash outflow was $307; cash declined $11 to $30.
- Debt and liquidity: Total debt was $7,697 at March 31, down from $7,828 at year-end. Cash was $30; working capital deficit was approximately $622. Reported available liquidity was approximately $1,982, including cash, after commercial-paper borrowings. PAA reported compliance with credit covenants.
- Distributions: Q1 distribution paid was $0.6150 per unit. A $0.6300 per-unit distribution was declared for payment in May 2014. Implied DCF exceeded distributions paid by $67, compared with $275 in Q1 2013.
Changes, outlook and management commentary
- Management attributed lower earnings primarily to less favorable crude-oil market conditions, which reduced opportunities for above-baseline Supply and Logistics margins, and costs incurred during severe winter weather to manage natural-gas storage deliverability. Transportation benefited from increased North American production and expansion projects.
- Supply and Logistics crude-oil lease-gathering volumes increased 4%, but segment profit per barrel fell to $2.37 from $4.21. Management said infrastructure development is relieving transportation constraints and expects normalization of margins to continue. It described underlying business fundamentals as strong, while noting results depend on market volatility, differentials and asset utilization.
- Transportation segment profit increased with higher throughput and expansion activity, particularly in the Permian and Eagle Ford. Facilities profit was broadly stable; severe-weather storage costs offset growth in NGL processing and rail-terminal activity.
- Management projected 2014 expansion capital expenditures of $1.75–$1.95 billion, subject to timing and scope adjustments. No specific earnings or cash-flow guidance is provided in the supplied filing text.
- Subsequent to quarter-end, PAA issued $700 million of 4.70% senior notes due 2044; net proceeds of approximately $691 million were intended to repay commercial paper and for general partnership purposes.
- A $37 million natural-gas inventory writedown was recorded following severe cold-weather storage conditions. Depreciation and amortization rose to $96 million from $82 million, partly because of accelerated depreciation on certain pipeline assets and completed growth projects.
Risks, contingencies and unusual items
- Environmental liabilities were estimated at $91 million undiscounted ($12 million short-term and $79 million long-term). PAA cautioned actual remediation costs could exceed reserves. Prior pipeline releases in Alberta and Mississippi involved remediation and regulatory actions; possible future fines or penalties remained for certain incidents.
- Ordinary-course litigation was not expected by management to have a material adverse effect. Claims challenging the PNG merger were voluntarily dismissed without settlement payments or concessions. PAA obtained a final judgment dismissing claims against it in the Big Star case; a related procedural matter in the Murphy case remained pending.
- Key risks include commodity-market and margin normalization, project execution and capital access, throughput and production levels, severe weather, environmental liabilities, counterparty credit, Canadian-dollar movements, and interest-rate and liquidity conditions. PAA uses derivatives to manage commodity, interest-rate and currency exposures and states it does not use them to speculate.
- Cash flow from operations was lower year over year, partly reflecting working-capital and inventory movements. The quarter-end working-capital deficit and reliance on commercial paper and capital markets warrant monitoring despite stated liquidity availability.
Important facts for investors to verify
- Whether planned expansion projects remain on schedule and within the $1.75–$1.95 billion 2014 capital-spending range.
- Whether Supply and Logistics margins stabilize as new infrastructure reduces regional transportation constraints.
- How severe-weather storage costs, inventory valuations and operating cash flow develop in subsequent quarters.
- Liquidity, commercial-paper usage, covenant compliance, and the impact of the post-quarter $700 million debt issuance on borrowings and interest expense.
- Whether environmental reserves adequately cover remediation obligations and any future penalties, particularly for the Alberta pipeline incidents.
- The sustainability of distributions relative to distributable cash flow and ongoing growth-capital needs.