Plains All American Pipeline, L.P. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Financial statements are unaudited; amounts are in millions except per-unit data. Plains transports, stores, terminals, supplies and markets crude oil, refined products and LPG, and operates natural gas storage facilities.
Financial results and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $6,414 | $4,857 | $18,662 | $12,442 |
| Operating income | $150 | $166 | $553 | $606 |
| Net income attributable to Plains | $81 | $122 | $363 | $469 |
| Basic earnings per limited partner unit | $0.28 | $0.65 | $1.73 | $2.84 |
| Operating cash flow | Not separately reported | Not separately reported | $463 | $347 |
- Revenue rose sharply, largely reflecting higher commodity prices and volumes in Supply & Logistics; these largely pass-through sales did not translate into higher segment profit.
- Q3 total segment profit fell 8% to $212; nine-month segment profit fell 6% to $748. Supply & Logistics profit declined to $2 from $44 in Q3 and to $152 from $282 year to date. Transportation and Facilities segment profit increased in both comparisons.
- Q3 Supply & Logistics results included an approximately $43 net mark-to-market loss, compared with an approximately $11 net gain in Q3 2009. Year-to-date segment performance was also affected by lower LPG margins than the unusually strong prior-year comparison and less favorable crude oil differentials and market conditions.
- Interest expense increased to $64 in Q3 and $183 for nine months, from $59 and $165, respectively. Depreciation and amortization was $61 and $192, respectively. The early redemption of $175 of senior notes contributed to a $6 loss.
- At September 30, cash was $13, current assets $3,771 and current liabilities $3,567, a $204 working-capital surplus. Total debt was $5,488, up from $5,216 at December 31, 2009. Total assets were $12,737.
- Nine-month investing cash outflow was $227 and financing cash outflow was $247. Investing included $197 for acquisitions and $323 for property, equipment and other additions; $268 was received from PNG’s sale of a noncontrolling interest. Cash declined by $12 to $13.
- Management reported approximately $1.331 billion of available liquidity, including unused credit facilities and cash, and stated that the Partnership was compliant with its covenants. Cash paid for interest was $191 for the first nine months.
Material changes and capital allocation
- PNG completed an IPO in May, issuing approximately 23% of its equity and raising about $268 net. Plains retained 77% control and continued consolidating PNG.
- In July, Plains issued $400 of 3.95% senior notes due 2015 and used proceeds to repay credit-facility borrowings. It redeemed $175 of 6.25% notes in September, recording the $6 early-redemption loss.
- Acquisition and internal-growth spending for the first nine months was $166 and $236, respectively; maintenance capital was $62. The company forecast 2010 capital expenditures excluding acquisitions of $465–$470, including $380 of growth projects and $85–$90 of maintenance capital.
- The declared quarterly distribution was $0.9500 per common unit, payable November 12, 2010, up approximately 3.3% year over year.
Outlook, risks and contingencies
- No full-year earnings or distribution guidance was provided. Management described a base level of Supply & Logistics earnings that can vary with market volatility, basis differentials and storage-market structure. LPG marketing is seasonal and weather-sensitive.
- Management cited adequate liquidity and expected to fund near-term needs with operating cash flow and credit facilities, and longer-term growth and acquisitions through operating cash flow, debt and/or equity. It cautioned that market disruptions or energy-price volatility could adversely affect results and liquidity.
- Key exposures include commodity-price and derivative risk, counterparty credit, Canadian-dollar exchange rates, pipeline throughput and production volumes, project execution, access to financing, weather, and environmental and operating incidents. Plains uses derivatives for risk management and reported no significant off-balance-sheet arrangements.
- An EPA/DOJ consent decree concerning prior crude-oil releases was approved; Plains paid $3.25, which had been fully reserved. SemCrude-related producer-lien claims involved approximately $23 and remained subject to defense.
- Environmental liabilities were reserved at approximately $66, with about $4 of related recovery receivables. A 2010 flood-related pipeline break may have released up to 165 barrels. The filing cautions that actual remediation costs may exceed reserves and insurance may not cover every loss.
- EPA alleged Clean Air Act violations at acquired Colorado truck terminals and referred the matter to DOJ; the filing did not quantify potential penalties. Separate legacy terminal contamination matters also remained, including disputed allocation of remediation costs.
Most important facts for investors to verify
- Whether Supply & Logistics margins recover, given the sharp year-over-year segment-profit decline and Q3 mark-to-market loss.
- Debt, borrowing availability and covenant compliance, including the effect of inventory financing and planned capital spending.
- Execution and funding of the forecast growth and maintenance projects, particularly natural gas storage expansion.
- Whether environmental reserves and insurance are sufficient, and the potential outcomes of the SemCrude and EPA-related matters.
- Distribution sustainability relative to operating cash flow, debt service, capital requirements and available liquidity.