Plains GP Holdings, L.P. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial statements are unaudited. PAGP is a holding partnership whose consolidated statements primarily reflect Plains All American Pipeline, L.P. (PAA), its operating subsidiary.
Business context and results
PAA operates crude oil, NGL and natural gas transportation, storage, processing and logistics businesses through Transportation, Facilities, and Supply and Logistics segments.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $8.792bn | $5.873bn | $25.269bn | $18.618bn |
| Operating income | $492m | $43m | $958m | $887m |
| Net income | $676m | $31m | $1.046bn | $607m |
| Net income attributable to PAGP | $111m | $4m | $154m | $69m |
| Net income per Class A share | $0.70 | $0.03 | $0.98 | $0.49 |
| Adjusted EBITDA (non-GAAP) | $635m | $489m | $1.732bn | $1.449bn |
Q3 operating margin was approximately 5.6%, versus 0.7% a year earlier; nine-month operating margin was approximately 3.8%, versus 4.8%. These measures are calculated from reported operating income and revenue. Q3 earnings included a $210m gain on the BridgeTex investment sale.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $1.292bn, down from $1.915bn in 2017. Investing activities used $184m, compared with $1.963bn used in 2017; financing activities used $1.112bn, versus $32m provided. Cash declined by $7m to $33m.
- Capital expenditures were $1.556bn for the nine months: $1.370bn expansion and $186m maintenance. The company invested approximately $1.37bn in midstream infrastructure.
- Total debt was $9.569bn at September 30, 2018, down from $9.920bn at year-end 2017. Senior notes were $8.939bn; short-term debt was $429m.
- Working capital deficit was $527m. Reported available liquidity, including cash, was approximately $2.492bn, subject to covenant compliance. PAA reported compliance with its debt covenants.
- Partners’ capital was $12.711bn. PAGP paid $142m in Class A distributions and $611m to noncontrolling interests during the first nine months.
Material changes and management commentary
- Nine-month net income rose 72% to $1.046bn, while PAGP-attributable income rose to $154m from $69m. Management cited stronger Permian transportation volumes, improved crude differentials and lease-gathering/NGL margins, lower depreciation and interest expense, and the BridgeTex sale gain. These benefits were partly offset by unfavorable derivative mark-to-market results and asset divestitures.
- Transportation Segment Adjusted EBITDA increased 16% to $1.083bn for nine months, with Permian Basin pipeline volumes up 33%. Facilities Segment Adjusted EBITDA decreased 4% to $530m. Supply and Logistics Segment Adjusted EBITDA improved to $120m from a $32m loss.
- Asset-sale proceeds were approximately $1.3bn in the first nine months, exceeding the company’s $700m 2018 divestiture target. The BridgeTex transaction generated $868m of proceeds for a 30% interest sold; PAGP retained a 20% interest.
- Management expected approximately $1.95bn of 2018 expansion capital, primarily focused on the Permian Basin. PAGP’s quarterly distribution remained $0.30 per Class A share, or $1.20 annualized; the November 2018 payment was declared.
Risks, contingencies and unusual items
- The 2015 Line 901 oil release remained a significant contingency. At September 30, 2018, the estimated aggregate cost was approximately $335m, with a remaining gross liability of $65m and an estimated $40m insurance receivable. A California jury found PAA guilty on one felony and eight misdemeanor counts; further proceedings, possible penalties, claims and investigations remained. The company stated that the verdict’s expected fines and penalties were not anticipated to materially affect its financial position or operations, but warned total costs could exceed its estimates.
- Environmental liabilities overall were estimated at $126m. Management warned that releases from pipeline, rail, storage or other operations could result in significant costs beyond recorded reserves or insurance.
- Line 901 and most of Line 903 remained out of service; no restart timeline had been established. Potential lost revenue from their shutdown was excluded from the Line 901 cost estimate.
- Commodity derivatives had a net fair-value liability of $341m. Derivative losses recognized in earnings were $450m for the first nine months, compared with $53m of losses in 2017; results are volatile and hedges may not offset underlying exposures in the same reporting period.
- The company identified potential effects from commodity prices and regional differentials, volume and counterparty changes, project execution, financing conditions, and Canadian-dollar exchange rates. A FERC policy change could constrain future tariff escalations from July 2021, although current tariffs were not directly affected.
Important facts for investors to verify
- How much of reported earnings and year-over-year improvement is attributable to the $210m BridgeTex gain, asset-sale effects and derivative timing, versus recurring operating performance.
- Whether projected 2018 expansion spending of $1.95bn and ongoing divestitures support leverage reduction without weakening cash generation or distributions.
- Developments in the Line 901 criminal, civil, regulatory and environmental matters, including actual penalties, insurance recoveries and any additional accruals.
- Liquidity and covenant headroom, given the working capital deficit, high debt balance and dependence on PAA credit facilities and commercial paper.
- Actual project progress and volumes in the Permian Basin, and future tariff impacts from FERC policy changes.