Plains All American Pipeline, L.P. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed February 27, 2012. This is an annual filing, not a standalone fourth-quarter report. PAA transports, stores, terminals and markets crude oil and refined products, and processes, transports, stores and markets NGLs; it also owns natural gas storage facilities. Its segments are Transportation, Facilities, and Supply & Logistics.
Financial performance and liquidity
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Total revenue | $34.275 billion | $25.893 billion | Up 32%; largely reflects higher commodity prices and volumes in the high-turnover Supply & Logistics business. |
| Operating income | $1.298 billion | $767 million | Up 69%. |
| Net income | $994 million | $514 million | Up 93%. |
| Net income attributable to Plains | $966 million | $505 million | Up 91%. |
| Diluted earnings per limited partner unit | $4.88 | $2.40 | Up 103%. |
| Segment profit | $1.560 billion | $1.026 billion | Up 52%. |
| Adjusted EBITDA | $1.598 billion | $1.106 billion | Up 44%; non-GAAP measure. |
| Implied distributable cash flow | $1.149 billion | $757 million | Up 52%; non-GAAP measure. |
| Net cash from operating activities | $2.365 billion | $259 million | 2011 benefited substantially from inventory reductions and related working-capital movements. |
| Capital expenditures and acquisitions | $2.055 billion | $855 million | Includes $1.404 billion acquisition capital and $531 million internal growth projects. |
| Total debt at year-end | $5.199 billion | $5.957 billion | Includes $4.520 billion long-term debt and $679 million short-term debt in 2011. |
| Available liquidity at year-end | $3.664 billion | — | Includes cash and borrowing capacity; the $1.2 billion 364-day facility was not activated. |
Reported gross margin was $1.592 billion, versus $1.027 billion in 2010. Revenue is dominated by commodity purchases and resales, so revenue growth alone is not a measure of underlying profitability. The filing does not present a single consolidated operating-margin measure as a key performance metric.
- Transportation: Segment profit of $555 million, up 8%; average daily volumes rose 2% to 3.047 million barrels. Basin and Permian volumes increased, partly offset by lower Rainbow and Capline volumes.
- Facilities: Segment profit of $358 million, up 33%; growth reflected storage expansions and acquisitions, including Southern Pines.
- Supply & Logistics: Segment profit of $647 million, up 170%; favorable production growth, crude differentials and market structure contributed. Management cautioned margins could normalize as new infrastructure eases bottlenecks.
Interest expense was $253 million, compared with $248 million. The 2011 effective weighted-average interest rate on debt was 5.4%. The partnership reported a $160 million working-capital deficit but said it was in compliance with debt covenants. Common-unit distributions declared for 2011 totaled $3.91 per unit, up from $3.76; the fourth-quarter distribution of $1.025 per unit was paid in February 2012.
Material changes versus 2010
- Net income attributable to Plains rose $461 million, primarily from stronger Supply & Logistics results and contributions from acquisitions and expansion projects.
- Operating cash flow increased sharply, largely because PAA reduced inventory; this should not be assumed to represent a similar increase in recurring cash generation.
- Facilities profit benefited from expanded storage assets, including the February 2011 Southern Pines natural gas storage acquisition for approximately $765 million. PAA also acquired the Gardendale system for approximately $349 million and Western assets for approximately $220 million late in 2011.
- PAA issued $600 million of 5.00% senior notes due 2021 and raised $889 million net from its own common-unit offerings. Consolidated debt declined year over year.
- Canadian tax restructuring effective January 1, 2011 increased entity-level Canadian tax exposure; total income tax expense was $45 million, compared with a $1 million benefit in 2010.
Outlook, risks and unusual items
- Outlook and investment: Management viewed U.S. production growth and regional infrastructure constraints as favorable for PAA’s assets, while noting weak economic conditions and uncertainty. The filing does not provide a clear 2012 earnings or EBITDA guidance figure. It forecasts 2012 expansion capital of $800–$950 million and maintenance capital of $130–$150 million.
- Pending BP NGL acquisition: PAA agreed to acquire BP Canada Energy Company for approximately $1.67 billion, subject to adjustments and regulatory and other closing conditions; closing was expected in Q2 2012. PAA paid a $50 million deposit. Management identified integration, Western Canadian supply, market competition and unhedged inventory price exposure as risks.
- Rainbow pipeline release: A crude-oil release in Alberta was detected April 29, 2011; the affected pipeline returned to full service August 30. Estimated cleanup and remediation cost was approximately $70 million before insurance recoveries. PAA recorded a $41 million insurance receivable it considered probable of recovery and a remaining approximately $2 million gross liability at year-end. The event reduced estimated 2011 Rainbow revenue by approximately $21 million.
- Environmental exposure: Total estimated environmental reserves were $74 million at year-end, partly offset by $47 million of recorded probable insurance and third-party recoveries. Actual costs may exceed estimates; the company also disclosed ongoing release, remediation and regulatory risks.
- Insurance: PAA did not renew its limited hurricane property and business-interruption coverage in June 2011 and said it planned to self-insure that risk for 2012.
- Other unusual items: PAA recorded a $23 million loss on early redemption of 7.75% senior notes. Depreciation expense benefited from useful-life extensions, reducing 2011 expense by approximately $60 million. A 2011 revision to prior-period allocations between limited and general partners was deemed immaterial and did not change total net income, earnings per unit or total partners’ capital.
- Principal broader risks: Commodity-market structure and differential volatility, counterparty credit, financing and credit ratings, acquisition execution, project approvals and returns, pipeline integrity and environmental liabilities, regulation, competition, and declining California offshore production. PAA disclosed $5.2 billion of debt and stated distributions may fluctuate and are not guaranteed.
Most important facts for investors to verify
- How much of the 2011 operating-cash-flow increase reflects temporary inventory and working-capital movements rather than sustainable cash generation.
- Whether Supply & Logistics margins normalize as new pipeline, rail and terminal capacity addresses regional bottlenecks.
- Completion, financing, integration and realized performance of the BP NGL acquisition, including exposure to NGL prices and supply trends.
- Final Rainbow release costs and insurance recoveries, and whether environmental reserves adequately capture remaining obligations.
- Debt maturities, covenant headroom and actual liquidity after planned acquisitions and capital spending; confirm the status of the unactivated 364-day facility.
- Whether the projected 2012 capital program earns targeted returns and supports distribution coverage and growth.