Business context and reporting period
Plains GP Holdings, L.P. (PAGP) filed this annual report for the fiscal year ended December 31, 2016; quarterly figures include the fourth quarter. PAGP has no operating assets of its own and its cash generation depends on distributions flowing from Plains All American Pipeline, L.P. (PAA) through Plains AAP, L.P. The consolidated financial statements include PAA, so the reported operating results, debt and cash flows primarily reflect PAA’s midstream business.
PAA operates crude oil and NGL transportation, storage, processing and marketing assets in the United States and Canada. Its segments are Transportation, Facilities, and Supply and Logistics.
Financial and operating performance
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $20.182 billion | $23.152 billion | Down 13% |
| Operating income | $990 million | $1.258 billion | Down 21% |
| Net income, consolidated | $660 million | $809 million | Down 18% |
| Net income attributable to PAGP | $94 million | $118 million | Down 20% |
| Basic and diluted earnings per PAGP Class A share | $0.94 | $1.41 | Down 33% |
| Net cash from operating activities | $711 million | $1.333 billion | Down 47% |
| Adjusted EBITDA, non-GAAP | $2.166 billion | $2.210 billion | Down 2% |
Consolidated operating margin was approximately 4.9% and net margin approximately 3.3%, based on reported revenue and income. The filing does not present a comparable gross-margin percentage as a headline measure. Fourth-quarter revenue was $5.952 billion and consolidated net income was $122 million; PAGP recorded an attributable loss of $8 million, or $0.08 per Class A share.
Adjusted EBITDA by segment was $1.141 billion for Transportation (up 8%), $667 million for Facilities (up 13%), and $359 million for Supply and Logistics (down 37%). The filing’s Adjusted EBITDA is a non-GAAP measure that excludes selected items, including certain derivative and inventory valuation effects; it should not be treated as GAAP net income or cash flow.
- Debt and liquidity: Consolidated debt was $11.839 billion at year-end, including $10.124 billion long-term and $1.715 billion short-term. Available liquidity was approximately $2.417 billion, subject to covenant compliance; working capital was a deficit of $391 million. PAA was in compliance with its debt covenants at year-end.
- Cash flow and investment: Investing cash outflow was $1.273 billion and financing cash inflow was $578 million. Acquisition, expansion and maintenance capital totaled $1.880 billion, including $1.405 billion of expansion capital.
- Distributions: PAGP declared $2.40 per Class A share for 2016 versus $2.35 in 2015. The fourth-quarter distribution was $0.55 per share, down from $0.62 a year earlier. PAA’s 2016 distribution was $2.65 per common unit versus $2.76 in 2015.
Material changes versus prior periods
- Revenue fell sharply year over year, principally reflecting lower crude oil and NGL prices, while the fee-based Transportation and Facilities segments improved their adjusted EBITDA. Supply and Logistics adjusted EBITDA declined substantially amid lower margins, competition and weaker market conditions.
- Operating cash flow fell to $711 million, affected by lower earnings and increased inventory and derivative margin balances funded with short-term debt. Reported revenue also reflects the large volume and price sensitivity of commodity sales and purchases.
- During 2016, PAA recognized $80 million of non-cash impairment losses on rail and terminal assets. Depreciation and amortization also included project write-offs and costs for assets taken out of service; approximately $100 million of net gains on asset sales and joint-venture formations partly offset these items.
- The November 2016 Simplification Transactions eliminated PAA’s incentive distribution rights and the economic rights associated with its 2% general partner interest. PAA issued 245.5 million common units to AAP and assumed $642 million of AAP debt. The transaction also unified governance and established a one-to-one economic alignment between PAGP Class A shares and the PAA common units attributable to PAGP’s AAP interest.
- PAA reduced its distribution level in connection with the simplification, with an estimated annual reduction in consolidated cash distributions of approximately $320 million. PAA also raised approximately $1.6 billion through Series A preferred units and approximately $796 million through common-unit issuances in 2016.
Outlook, management commentary, risks and unusual items
- Management expected challenging industry conditions to persist in the near term, but anticipated improvement in market conditions and Lower 48 production during the latter half of 2017 and into 2018. That outlook depended in part on whether OPEC and participating non-OPEC countries implemented targeted production cuts; the filing cautions that recovery is not assured.
- PAA planned approximately $800 million of 2017 expansion capital, primarily in fee-based assets, with limited expected contribution to 2017 results and anticipated growth from 2018 onward. Management expected year-end 2017 long-term debt to be at or below its December 2016 level, relying on asset-sale proceeds, equity issuances and retained cash flow.
- After year-end, PAA acquired the Alpha Crude Connector gathering system for approximately $1.215 billion, initially funded with credit-facility borrowings. Additional planned asset sales and joint-venture transactions remained subject to closing conditions and, where applicable, regulatory approval.
- PAA had approximately $11.9 billion of debt and management expected its long-term debt-to-adjusted-EBITDA ratio to be above its target range in the near term. Moody’s placed PAA’s investment-grade rating under review for downgrade in late January 2017. A downgrade could raise borrowing costs, reduce available credit and affect distributions.
- The 2015 Line 901 California pipeline release remained a material contingency. The company estimated total incident costs of approximately $280 million, with a remaining gross liability of $75 million at year-end and a recognized receivable of approximately $49 million for costs considered probable of insurance recovery. Investigations, criminal charges, lawsuits and potential fines or penalties remained outstanding; actual costs could exceed estimates. Line 901 and Line 903 were not operating, and no restart timeline was established.
- Other significant risks include excess midstream capacity and competition for volumes, lower producer activity, commodity-market structure and volatility, customer and counterparty credit, environmental and pipeline-safety liabilities, regulatory changes, capital-market access, and the ability to complete projects and asset sales. Marathon Petroleum, ExxonMobil and Phillips 66 accounted for 18%, 14% and 11% of 2016 revenue, respectively.
- PAA’s Series A preferred units carry cumulative distributions of 8% annually and rank senior to common units. PAA paid some preferred distributions in additional preferred units during 2016, affecting liquidity and the cash available to common holders.
Most important facts for investors to verify
- Whether PAA’s cash flow, leverage and credit ratings support distributions to AAP and, ultimately, PAGP shareholders; PAGP’s cash generation depends on that distribution chain.
- Whether the projected 2017 asset sales close as expected and whether proceeds, equity issuance and retained cash flow are sufficient to fund the Alpha acquisition, capital program and debt objectives.
- Whether production, pipeline utilization, margins and Supply and Logistics results recover as management anticipated, given overcapacity and competition.
- The ultimate financial and operational effects of the Line 901 incident, including insurance recoveries, litigation, regulatory actions, penalties and any decision on restarting affected pipelines.
- The assumptions behind non-GAAP Adjusted EBITDA and the reported $80 million impairment, asset-sale gains and derivative-related adjustments; compare these with GAAP earnings and operating cash flow.
- The distribution implications of PAA’s preferred-unit obligations, including any further in-kind payments, and the timing and terms of potential conversion into common units.