PLAINS GP HOLDINGS, L.P. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. PAGP is a holding partnership whose cash-generating assets are its indirect interests in Plains All American Pipeline, L.P. (PAA). Consolidated results largely reflect PAA, and substantial earnings belong to noncontrolling interests.
Financial performance and position
Amounts are in millions of dollars except per-share data.
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $8,375 | $8,398 |
| Operating income | $713 | $380 |
| Net income | $914 | $273 |
| Net income attributable to PAGP | $147 | $37 |
| Basic and diluted earnings per Class A share | $0.92 | $0.23 |
| Adjusted EBITDA | $861 | $592 |
| Cash from operating activities | $1,032 | $520 |
- Operating margin was approximately 8.5%, compared with 4.5% in Q1 2018, based on reported revenue and operating income.
- Segment Adjusted EBITDA: Transportation $399 (up 19%); Facilities $184 (down 1%); Supply and Logistics $278 (up $206 million year over year).
- Operating cash flow increased, with management citing earnings and inventory reductions; working-capital changes also benefited the period. Investing cash outflow was $429, including $280 of additions to property and equipment and other assets and $125 invested in unconsolidated entities. Financing cash outflow was $197.
- At March 31, cash and cash equivalents were $439, restricted cash was $33, and working capital surplus was $66. Reported available liquidity was approximately $3.284 billion, including facility availability and cash.
- Total debt was $9.326 billion, including $8.943 billion of senior notes, net. PAA had no period-end borrowings under its credit agreements or commercial paper program and was in covenant compliance. Outstanding letters of credit were $155 million.
Material changes and unusual items
- Revenue was broadly flat, while operating income and earnings rose. The $267 million non-cash gain on the Capline transaction materially increased reported earnings: PAGP contributed its pipeline interest to Capline Pipeline Company LLC and now accounts for its 54% interest as an equity-method investment.
- Supply and Logistics benefited from favorable crude-oil grade differentials, higher NGL margins and more favorable derivative mark-to-market effects. Transportation results benefited from increased Permian volumes and completed expansion projects. Adjusted EBITDA excludes selected items, including certain derivative effects and inventory adjustments.
- Adjusted EBITDA rose 45% to $861 million. This measure is non-GAAP and is not directly comparable to GAAP net income.
- Operating lease accounting adopted January 1, 2019 added approximately $560 million of right-of-use assets and $570 million of lease liabilities at adoption, with no material impact on earnings or cash flows. At quarter-end, operating lease liabilities were $487 million.
Outlook, distributions and risks
- Management expected full-year 2019 expansion capital expenditures of approximately $1.35 billion, primarily focused on the Permian Basin. Q1 expansion spending was $351 million; maintenance capital was $46 million.
- In April, PAA announced completion of its leverage reduction plan, a lower long-term debt-to-Adjusted-EBITDA target of 3.0x–3.5x, and a focus on sustainable distribution coverage and capital discipline. PAA also announced a 20% increase in its common-unit distribution. PAGP’s quarterly Class A distribution was increased to $0.36 per share, or $1.44 annualized.
- Line 901 spill liabilities remain a significant contingency. The company estimated aggregate costs incurred or expected at approximately $355 million and reported a remaining gross liability of $75 million. It had collected $187 million of approximately $240 million in costs considered probable of insurance recovery and recorded a further $53 million receivable. Additional costs, penalties or claims could exceed estimates; related investigations and litigation remain pending. PAA was sentenced in April 2019 to pay just under $3.35 million in fines and penalties, with restitution hearings to follow.
- Other key risks cited include commodity-price and market-structure changes, lower throughput or production, competition and infrastructure overbuild, project execution and permitting, counterparty credit, Canadian-dollar movements, and environmental or operational incidents. Management cautioned that financial-market disruption or energy-price volatility could adversely affect liquidity and results.
Key facts for investors to verify
- How much of earnings growth reflects sustainable operating performance versus the $267 million Capline gain and volatile derivative and inventory effects.
- Whether Permian volumes, expansion projects and the $1.35 billion capital program deliver expected returns while preserving PAA’s leverage and distribution objectives.
- Whether the Line 901 cost estimate, insurance recoveries and remaining liability adequately capture future claims, penalties and remediation costs.
- How operating cash flow and the reported liquidity position evolve after inventory and working-capital effects, capital spending and increased distributions.