Plains All American Pipeline, L.P. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Unless otherwise noted, amounts are in millions of dollars. Plains transports, stores, terminals and markets crude oil, refined products and natural gas liquids (NGL), and operates natural gas storage facilities through three segments: Transportation, Facilities, and Supply and Logistics.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $10,620 | $9,218 | 15% |
| Operating income | $655 | $313 | +$342 |
| Net income | $536 | $237 | 126% |
| Net income attributable to Plains | $528 | $230 | 130% |
| Diluted net income per limited partner unit | $1.27 | $0.51 | +$0.76 |
| Adjusted EBITDA (non-GAAP) | $739 | $472 | 57% |
| Implied distributable cash flow (non-GAAP) | $560 | $342 | 64% |
| Net cash provided by operating activities | $979 | $317 | +$662 |
Management attributed the improved results principally to stronger Supply and Logistics margins, favorable crude oil location and quality differentials, higher NGL margins and volumes, contributions from the 2012 BP NGL and USD Rail Terminal acquisitions, and a favorable year-over-year mark-to-market impact from derivatives. Derivative-related gains included in adjusted EBITDA were $24 million in Q1 2013 versus losses of $59 million in Q1 2012; reported results and adjusted measures therefore reflect differing treatment of derivative timing effects.
Segments and material period-over-period changes
- Supply and Logistics: Segment profit rose to $434 million from $128 million; profit per barrel increased to $4.21 from $1.51. Average daily volumes increased 23% to 1.145 million barrels. Management cited constrained takeaway capacity and favorable differentials, but expects margins to normalize as infrastructure develops.
- Facilities: Segment profit increased to $150 million from $90 million; profit per barrel was $0.42 versus $0.33. Growth reflected BP NGL assets and expanded rail-terminal activity. Segment volumes rose 31%.
- Transportation: Segment profit was $164 million versus $162 million, while profit per barrel declined to $0.50 from $0.56. Higher tariffs and volumes were partly offset by increased operating costs, including environmental response expenses.
- Reported 2012 results exclude the full-period contribution of acquisitions completed during 2012. The filing’s pro forma Q1 2012 figures, assuming specified 2012 acquisitions had occurred at the start of that quarter, show revenue of $10,064 million and net income attributable to Plains of $230 million.
Cash flow, liquidity, debt and distributions
- Operating cash flow was $979 million; investing cash outflow was $444 million and financing cash outflow was $535 million. The operating cash flow increase included a favorable inventory reduction, particularly NGL inventory liquidation, with proceeds used to repay credit-facility borrowings.
- Cash was $24 million at both March 31, 2013 and December 31, 2012. The partnership reported a $118 million working-capital surplus and $2.766 billion of available liquidity, including undrawn facility capacity.
- Total debt declined to $7.020 billion from $7.406 billion at year-end. Senior notes were $6.010 billion net of discount; the filing classifies $250 million of 5.63% notes due December 2013 as short-term debt. Plains reported compliance with credit covenants.
- Q1 capital expenditures were $403 million, including $358 million for internal growth projects and $44 million for maintenance. Projected 2013 expansion capital was $1.35–$1.55 billion, subject to timing and scope adjustments.
- The partnership paid a $0.5625 per-unit quarterly distribution in February and declared $0.5750 per unit for payment on May 15, 2013, described as a 10% year-over-year increase.
Outlook, risks and unusual items
- The filing provides project spending plans but no specific earnings guidance. Management said strong Supply and Logistics margins benefited from production growth and logistics constraints, while warning that margins may normalize as midstream infrastructure expands.
- Commodity, interest-rate and Canadian-dollar exposures are managed using derivatives; the partnership states it does not use derivatives to speculate on outright commodity-price changes. Derivatives nevertheless create valuation, margin and timing risks.
- Environmental exposures remain material. Estimated undiscounted environmental reserves were $101 million at March 31, 2013, with $16 million of related insurance or third-party recovery receivables recorded. The Bay Springs pipeline release was estimated at about 125 barrels, with cleanup and remediation costs expected not to exceed $10 million. Potential penalties had not been assessed for the Rainbow release, and future costs or penalties could exceed current estimates.
- For the 2011 Rainbow release, Plains reported approximately $70 million spent through quarter-end; Alberta regulators had issued enforcement actions and civil charges were filed in April 2013. For the 2012 Rangeland release, approximately $45 million had been spent and the incident remained under investigation. Plains said neither had material outstanding liabilities or insurance receivables at quarter-end.
- In litigation, Pemex seeks damages and penalties from Plains Marketing in condensate-related cases; the filing says Plains was dismissed from one case and had sought summary judgment in the other. Management did not believe legal proceedings would have a material adverse effect, but outcomes remain uncertain.
- Other risks identified include access to capital, counterparty credit, operational interruptions, acquisition integration, project execution, weather, demand and volume changes, and environmental liabilities. Management stated disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether unusually strong Supply and Logistics margins and derivative benefits persist, particularly as new infrastructure addresses regional takeaway constraints.
- Whether operating cash flow remains strong after the benefit from inventory liquidation and associated working-capital changes.
- Progress, cost and funding of the $1.35–$1.55 billion 2013 expansion program, including the effects of further unit issuance or borrowing.
- Repayment or refinancing of the $250 million notes due December 2013 and ongoing covenant compliance and liquidity.
- Final remediation costs, insurance recoveries, regulatory actions and possible penalties related to pipeline releases, including the $101 million environmental reserve.