Plains All American Pipeline, L.P. — Q2 2014 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2014, compared with the corresponding 2013 periods. Plains owns and operates midstream energy infrastructure and logistics services for crude oil, natural gas liquids (NGL), natural gas and refined products. Its segments are Transportation, Facilities, and Supply and Logistics. Dollar amounts below are in millions except per-unit data.
Financial and operating metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $11,195 | $10,295 | $22,878 | $20,915 |
| Operating income | $365 | $383 | $857 | $1,037 |
| Net income attributable to PAA | $287 | $292 | $671 | $821 |
| Diluted net income per limited partner unit | $0.45 | $0.57 | $1.18 | $1.84 |
| Adjusted EBITDA (non-GAAP) | $512 | $478 | $1,079 | $1,217 |
| Implied distributable cash flow (non-GAAP) | $367 | $342 | $776 | $904 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $963 | $1,337 |
Segment profit in Q2 was $221 Transportation, $134 Facilities and $133 Supply and Logistics; the comparable 2013 amounts were $160, $149 and $176. For the six months, segment profit was $427, $288 and $382, respectively, versus $323, $300 and $610. Transportation volumes and results benefited from North American production growth and completed projects. Supply and Logistics earnings weakened year over year, particularly in the first quarter, as crude-market opportunities for above-baseline margins diminished.
At June 30, 2014, total debt was $8,177, including $763 short-term debt and $7,414 long-term debt, compared with $7,828 at December 31, 2013. Cash was $27; working capital was negative $255. Reported available liquidity was approximately $2,229, including $2,202 of facility availability after commercial-paper borrowings. The partnership reported compliance with debt covenants. Total assets were $21,495 and partners’ capital was $8,112.
Six-month investing cash outflow was $1,101, including $918 of property and equipment additions and $67 invested in unconsolidated entities. Financing cash flow was positive $124, including $698 proceeds from senior notes, $453 net proceeds from common-unit issuance, and $344 net repayments under the commercial-paper program. The partnership paid $704 in distributions during or pertaining to the first half. Q2 implied DCF exceeded distributions by $7; first-half DCF exceeded distributions by $72.
Material changes versus the prior comparable period
- Q2 revenue rose 9%, but net income attributable to PAA declined 2% and diluted earnings per unit declined 21%. For the first half, revenue rose 9%, while attributable net income fell 18% and diluted earnings per unit fell 36%.
- First-half Supply and Logistics segment profit fell $228, reflecting fewer favorable crude-oil margin opportunities and severe-cold-weather-related natural gas storage costs. The partnership recorded a $37 inventory write-down for natural gas bought to manage storage deliverability during the cold weather.
- Transportation segment profit increased 38% in Q2 and 32% for the first half, supported by higher throughput, growth projects and increased equity earnings from an Eagle Ford joint venture.
- Facilities segment profit declined 10% in Q2 and 4% year to date. Natural gas storage results were hurt by lower contract rates and, in the first half, cold-weather costs. Effective January 1, natural gas sales and related costs were reclassified from Facilities to Supply and Logistics.
- Operating cash flow declined $374 year over year in the first half, while capital investment increased: acquisition, growth and maintenance expenditures totaled $1,109 versus $913.
- In April, PAA issued $700 of 4.70% senior notes due 2044. Total debt increased from year-end, while commercial-paper borrowings declined.
Outlook, commentary, risks and unusual items
- Management forecast 2014 expansion capital expenditures of $1.85 billion to $2.05 billion, subject to project timing, scope, permitting, regulatory approvals, weather and cost changes. It anticipated funding through operating cash flow, borrowings and capital-market access as needed.
- The distribution declared for Q2 was $0.6450 per unit, payable August 14, 2014, a 9.8% increase over the distribution paid in August 2013. The filing provides no specific full-year earnings or DCF guidance.
- Management said crude-oil logistics margins may continue to normalize as infrastructure constraints ease, despite higher lease-gathered volumes. Market volatility, basis differentials, demand and weather can materially affect Supply and Logistics performance.
- Key stated risks include delays or underperformance in growth projects, commodity-market changes, lower throughput, extreme weather, environmental liabilities, counterparty and capital-market access risks, interest rates and Canadian-dollar movements.
- Environmental liabilities were estimated at $92, including $13 short term. The partnership described past pipeline releases and ongoing remediation/monitoring matters. Canadian charges relating to the Rainbow and Rangeland releases were settled in July 2014 for C$450,000 and C$850,000, respectively; these events occurred after quarter-end. Estimated Kemp River release cleanup costs were approximately $15, with $8 spent through June 30. A subsidiary also agreed to a $260,000 EPA penalty concerning alleged LPG-facility risk-management violations, with no injunctive relief.
- Management reported no material adverse effect expected from ordinary-course litigation and stated disclosure controls were effective. Severe winter weather led to storage deliverability costs and the $37 inventory write-down; depreciation also rose partly due to accelerated depreciation on certain pipeline assets and newly completed growth projects.
Most important facts for investors to verify
- Whether Transportation growth projects sustain throughput and segment-profit gains as crude production and infrastructure capacity evolve.
- Whether Supply and Logistics margins and natural gas storage economics recover, and whether cold-weather-related costs or inventory effects recur.
- Execution, cost, timing and funding of the $1.85–$2.05 billion expansion program, including the planned distribution and reliance on debt and equity markets.
- Debt maturities, commercial-paper backstop capacity, covenant compliance and the ability to maintain liquidity under adverse market conditions.
- Environmental reserve adequacy, remaining remediation exposure and any regulatory outcomes or penalties beyond the settlements disclosed.
- How non-GAAP adjusted EBITDA and implied DCF reconcile to GAAP results, and whether distributions remain covered as capital spending continues.