Plains GP Holdings, L.P. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. PAGP is a holding partnership whose cash-generating interests are primarily indirect interests in Plains All American Pipeline, L.P. (PAA); substantially all consolidated assets and liabilities are PAA’s, apart from PAGP’s deferred tax asset. PAA operates crude oil and NGL pipeline, storage, terminalling and related businesses in the United States and Canada.
Financial highlights
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $14.336 billion, up 33% from $10.776 billion | $44.390 billion, up 53% from $29.089 billion |
| Net income attributable to PAGP | $71 million, versus a $24 million loss | $124 million, versus a $24 million loss |
| Basic and diluted earnings per Class A share | $0.36, versus a $0.12 loss | $0.64, versus a $0.12 loss |
| Operating cash flow | Not presented separately for the quarter | $2.070 billion, versus $1.358 billion |
| Segment Adjusted EBITDA | $622 million, versus $513 million | $1.849 billion, versus $1.630 billion |
| Adjusted EBITDA attributable to PAA | $623 million, versus $514 million | $1.851 billion, versus $1.631 billion |
Consolidated net income was $420 million in Q3 and $868 million for the first nine months, including amounts attributable to noncontrolling interests. These results are not the same as net income attributable to PAGP. Adjusted EBITDA and Segment Adjusted EBITDA are non-GAAP measures; the filing cautions that their definitions may differ from similarly named measures at other companies.
Margins and segment performance: Revenue includes high-volume, low-margin commodity sales, so revenue growth alone is not a measure of improved profitability. Q3 Crude Oil Segment Adjusted EBITDA was $536 million, up 17%; NGL was $86 million, up 59%. For the nine months, Crude Oil was $1.482 billion, roughly flat, while NGL increased to $367 million from $144 million. Management cited stronger NGL fractionation spreads and greater pipeline tariff volumes, particularly in the Permian, as key drivers.
Cash, debt and liquidity: Cash was $625 million at September 30, versus $452 million at year-end 2021. Total debt was $8.445 billion, down from $9.220 billion; current liabilities were $5.335 billion and current assets were $5.576 billion. Reported available liquidity was $3.267 billion, including cash and available capacity under PAA credit facilities, subject to covenant compliance. PAA redeemed $750 million of senior notes in March and amended its credit facilities in August, extending the inventory facility maturity to August 2025 and the revolving facility to August 2027. PAA reported compliance with its debt covenants.
For the first nine months, investing cash flow was a $291 million use and financing cash flow was a $1.605 billion use. Capital expenditures were $482 million: $262 million investment, $146 million maintenance and $74 million acquisition capital. Net income and operating cash flow were affected by working-capital and other items; operating cash flow should not be treated as a direct proxy for distributable cash.
Changes versus the prior comparable period
- Revenue rose substantially, primarily reflecting higher commodity prices and volumes; purchases and related costs also increased. Average WTI was $91 per barrel in Q3 2022 versus $71 in Q3 2021.
- Profitability improved from the prior-year loss. Management attributed year-to-date improvement mainly to stronger NGL margins and crude pipeline earnings, partly offset by the loss of benefits from 2021 contango hedge monetization, the 2021 natural gas storage facility sale, and higher costs.
- Asset-sale and impairment results shifted markedly: 2022 included a $46 million net gain for the nine months, compared with a $592 million net loss in 2021, which included substantial storage-asset impairment charges.
- Other expense included a $196 million year-to-date loss from fair-value changes in PAA’s Series A Preferred Distribution Rate Reset Option, versus a $13 million gain in 2021. The quarter’s loss was $49 million. This noncash mark-to-market item contributed to the difference between operating results and reported net income.
- Interest expense declined modestly year over year, partly due to lower average debt following the $750 million note repayment.
Outlook, commentary and material risks
- Management projected 2022 investment capital of approximately $330 million gross ($275 million net to its interest) and maintenance capital of $220 million gross ($210 million net). It expected to fund these primarily with retained cash flow.
- The Q3 PAGP distribution was $0.2175 per share, unchanged from the prior quarter. On November 2, 2022, the partnership announced an intention to recommend a $0.20 per unit/share annualized distribution increase for Q4, subject to Board approval and declaration; if approved, it would be paid in February 2023.
- Line 2000 in California was temporarily taken out of service after a routine inspection. Further testing could lead to a shortened useful life or partial impairment of the asset group, carried at approximately $540 million excluding linefill.
- For the 2015 Line 901 incident, the company estimated total costs of approximately $730 million and reported a remaining gross liability of approximately $330 million at September 30. It had recognized an insurance receivable of approximately $240 million, subject to collection, and stated that it expected to reach the applicable $500 million insurance-program limit. A $230 million class-action settlement was paid on October 27, 2022; remaining litigation and claims create uncertainty, and actual costs could exceed estimates.
- On October 13, 2022, Line 901 and part of Line 903 were sold; the buyer assumed specified Consent Decree obligations related to future ownership and operation. On November 2, PAGP completed an additional 5% Cactus II Pipeline purchase for approximately $88 million, bringing its interest to 70% and giving it control; consolidation and remeasurement were expected to result in a gain.
- Risks highlighted include commodity-market and volume volatility, counterparty credit and performance, competition, inflation and supply constraints, access to capital and credit ratings, environmental obligations and litigation, operational incidents, weather and cyber events, insurance adequacy, and Canadian currency movements. Management said liquidity was sufficient for anticipated commitments, but prolonged cash-flow weakness could impair borrowing capacity or increase borrowing costs.
Important facts for investors to verify
- Whether higher NGL margins and crude pipeline volumes persist, and how much reported growth reflects commodity prices and merchant turnover rather than durable fee-based earnings.
- The assumptions behind Adjusted EBITDA and the effects of derivative timing, the preferred-unit reset option, and noncontrolling interests on reported and attributable results.
- Progress on Line 2000 inspections and any resulting impairment, and the ultimate cost, insurance recovery and resolution of remaining Line 901 claims.
- Whether the announced distribution increase receives Board approval and whether cash generation supports distributions alongside debt service and capital spending.
- The impact of consolidating Cactus II, including the resulting reported gain, future earnings and debt, and the continued availability of PAA’s credit facilities under covenant requirements.