Plains GP Holdings, L.P. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Plains GP Holdings (PAGP) is a holding partnership whose results primarily reflect its indirect interests in Plains All American Pipeline (PAA), a crude oil, NGL, natural gas and refined-products midstream business. Unless noted, financial figures are in millions of dollars.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Revenue | $6,667 | $4,111 |
| Operating income | $589 | $281 |
| Net income | $402 | $177 |
| Net income attributable to PAGP | $41; $0.34 basic and diluted per Class A share | $36; $0.39 basic and $0.37 diluted per share |
| Adjusted EBITDA (non-GAAP) | $511 | $632 |
| Operating cash flow | $815 | $631 |
| Total debt | $11,220 | $11,839 at Dec. 31, 2016 |
| Cash and cash equivalents | $41 | $50 at Dec. 31, 2016 |
Operating margin was approximately 8.8% of revenue, versus 6.8% in the prior-year quarter. Revenue growth largely reflects higher commodity prices and supply-and-logistics activity; it should not be read as equivalent growth in underlying profitability. Adjusted EBITDA fell 19%, to $511, with Supply and Logistics adjusted EBITDA down 72% to $51. Transportation adjusted EBITDA was $273, down 3%, while Facilities rose 13% to $188.
Cash flow from operations increased by $184, helped in part by reduced margin balances and lower inventory volumes. Investing activities used $1,491, including $1,254 net cash for acquisitions and $275 for property, equipment and other additions. Financing activities provided $667, including $1,535 net proceeds from PAGP Class A share sales. Working capital was reported as a $56 surplus; available liquidity was approximately $2,756, including facilities, commercial paper capacity and cash. PAA was in compliance with credit covenants at quarter-end.
At March 31, total assets were $27,508 and partners’ capital was $12,827. Senior notes were approximately $9,876 net of discounts and costs; short-term debt was $1,341. The current ratio was approximately 1.01. Interest expense rose 11% to $129. Income tax expense increased to $106 from $40, including higher deferred tax expense.
Material changes and notable transactions
- Revenue rose 62%, while consolidated net income more than doubled. Results included favorable derivative gains; the company’s reconciliation excludes significant period-to-period derivative and inventory effects, and adjusted EBITDA declined.
- PAGP acquired the Alpha Crude Connector system in the Northern Delaware Basin for approximately $1,217, and a propane marine terminal for approximately $41. The ACC purchase-price allocation was preliminary and included $278 of goodwill.
- The company sold non-core assets for $161 in proceeds and recorded a $36 gain on one pipeline sale. It classified approximately $490 of assets as held for sale and recorded a $31 impairment. Management expected additional sales of approximately $500 to close in Q2 or early Q3, subject to conditions and approvals.
- PAGP issued 50.1 million Class A shares for $1,535 net proceeds. The quarterly distribution was $0.55 per share, unchanged from the prior two quarters but approximately 11% below the year-earlier distribution.
- Total reported debt declined by $619 from year-end, including repayment of $400 of 6.13% senior notes in January. Short-term working-capital and hedged-inventory borrowings remain substantial.
Outlook, risks and contingencies
- Management expected crude production to ramp up in the second half of 2017, particularly in the Permian Basin, potentially improving pipeline utilization and eventually easing Supply and Logistics margin pressure. This was an expectation, not earnings guidance; the filing gives no specific full-year earnings or adjusted EBITDA forecast.
- Planned 2017 expansion capital was approximately $900, including the Diamond Pipeline, Permian Basin systems and other projects. Management expected equity proceeds and non-core asset sales to help fund capital needs.
- Management cited intense competition, excess midstream capacity, compressed margins, commodity-price and market-structure volatility, and the possibility that new infrastructure could worsen excess takeaway capacity. Acquisitions and expansion projects may not deliver targeted returns.
- Environmental and litigation exposure remains material. The 2015 Line 901 California spill had an estimated total cost of approximately $280; the remaining gross liability was $68, with a recognized insurance receivable of approximately $41. Lines 901 and 903 remained shut down, with no restart timeline. Further claims, penalties, legal costs or remediation costs could exceed estimates. The securities class actions were dismissed on March 29, 2017, but plaintiffs could appeal or refile.
- Environmental reserves totaled $139 across matters. The filing warns actual costs may exceed reserves. Separately, the Bakersfield facility faced an EPA notice of violation; PHMSA imposed a $184,300 civil penalty related to the Mesa to Basin pipeline release.
- PAGP identified possible impairment or retirement costs for the idled California pipelines and its Capline interest. A proposed U.S. corporate tax-rate reduction, if enacted, could require a write-off of part of PAGP’s deferred tax asset.
Most important facts for investors to verify
- Whether Q1’s favorable derivative and inventory valuation effects recur, and how operating performance compares using adjusted EBITDA alongside GAAP results.
- Whether the expected second-half production recovery occurs and improves volumes, margins and utilization amid continued competition and capacity overhang.
- Completion, proceeds and timing of the planned asset sales, and whether the $900 expansion program and recent acquisitions meet expected returns.
- Debt, covenant headroom and liquidity after acquisition spending, distributions and equity issuance; also assess reliance on short-term borrowings and further capital-market access.
- Developments in the Line 901/903 investigations, litigation, penalties, insurance recoveries and restart prospects, including potential exposure beyond recorded reserves.
- Distribution sustainability: the $0.55 quarterly rate and its year-over-year reduction, considered against operating cash flow, capital needs and debt service.