Business context and reporting period
Plains GP Holdings, L.P. (PAGP) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. PAGP is a holding entity whose cash flows are principally derived from its indirect investment in Plains All American Pipeline, L.P. (PAA); substantially all consolidated operating assets and liabilities are PAA’s. PAA operates crude oil, NGL and natural gas midstream infrastructure through Transportation, Facilities, and Supply and Logistics segments.
Financial performance and position
Amounts below are in millions of dollars, except per-share data.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $7,886 | $8,792 | $24,515 | $25,269 |
| Operating income | $490 | $492 | $1,651 | $958 |
| Net income | $431 | $676 | $1,771 | $1,046 |
| Net income attributable to PAGP | $70 | $111 | $283 | $154 |
| Basic net income per Class A share | $0.41 | $0.70 | $1.73 | $0.98 |
| Adjusted EBITDA (non-GAAP) | $730 | $635 | $2,373 | $1,732 |
- Q3 revenue fell 10%; nine-month revenue fell 3%. The decline largely reflects lower Supply and Logistics revenue, where commodity purchase and sale amounts can move with market prices. Operating income was nearly unchanged in Q3 and rose 72% for the nine-month period.
- Q3 net income attributable to PAGP declined 37%, while nine-month PAGP income increased 84%. Q3 2018 included a $210 million gain on an investment, versus $4 million in Q3 2019. Nine-month 2019 included a $269 million non-cash Capline-related gain; 2018 included a $210 million BridgeTex-related gain.
- Management attributed stronger year-to-date results mainly to favorable crude oil differentials, improved NGL results and derivative impacts in Supply and Logistics, and higher Permian Basin transportation volumes. Nine-month Segment Adjusted EBITDA was $1,271 for Transportation, $529 for Facilities and $571 for Supply and Logistics.
- Operating cash flow for the first nine months was $1,774, compared with $1,292 in 2018. Investing cash outflow was $1,367; financing cash inflow was $199. Cash and restricted cash totaled $670 at September 30.
- Total debt was $10,257, versus $9,209 at year-end 2018; short-term debt was $1,084. PAA issued $1.0 billion of 3.55% senior notes due 2029 during September. Total current liabilities exceeded current assets by $195, but reported available liquidity was $3,462, including $2,851 of credit-facility availability and $611 cash. PAA reported compliance with its debt covenants.
- Capital spending in the first nine months included $988 of expansion capital, $204 of maintenance capital and $47 of acquisition capital. The filing reports no clear consolidated gross-margin figure; it provides segment performance measures instead.
Material changes, outlook and management commentary
- Transportation Segment Adjusted EBITDA increased 19% in Q3 and 17% year to date, supported by higher pipeline volumes, particularly in the Permian Basin. Facilities Segment Adjusted EBITDA was flat in Q3 and slightly lower year to date. Supply and Logistics Segment Adjusted EBITDA rose 23% in Q3 and substantially year to date, though the prior-year comparison was affected by derivative and other selected items.
- Management expected full-year 2019 expansion capital of approximately $1.35 billion, primarily for Permian Basin projects. The filing gives no specific full-year earnings or revenue guidance. It describes PAA’s long-term policy target of 3.0x–3.5x debt-to-Adjusted-EBITDA leverage and minimum annual distribution coverage of 130%, with distribution increases contingent on meeting targets and annual review.
- PAGP declared a quarterly distribution of $0.36 per Class A share, payable November 14, 2019. Management said available liquidity and cash flow were sufficient for expected commitments, but noted that prolonged market disruption or energy-price volatility could adversely affect financial condition and cash flows.
- Joint-venture projects include Wink to Webster and Red Oak, both targeted to begin service in 2021; Red Oak remains subject to permits and regulatory approvals. Capline owners sanctioned a system reversal in Q3. Project economics and timing depend in part on shipper interest and approvals.
- Environmental and litigation exposure remains material. For the 2015 Line 901 spill, the company estimated aggregate total costs incurred or expected at approximately $380 million and reported a remaining gross liability of $79 million at September 30, 2019, alongside a $55 million insurance receivable. Further natural-resource damages, claims, legal costs, fines or penalties could increase costs; the company said estimates are subject to uncertainty. The two remaining California felony counts were dismissed in October 2019.
- Other notable items: adoption of lease accounting added approximately $560 million of right-of-use assets and $570 million of lease liabilities at January 1, 2019, without material impact on earnings or cash flows. Alberta’s enacted tax-rate reduction generated a $60 million deferred tax benefit in Q2. Management concluded disclosure controls were effective and reported no material third-quarter change in internal control over financial reporting.
Key facts for investors to verify
- Whether the gains and derivative effects included in reported earnings are recurring; compare GAAP results with the company’s non-GAAP Adjusted EBITDA reconciliations.
- Progress against the $1.35 billion expansion-capital plan, project costs, permitting and shipper commitments for major pipeline ventures.
- Debt refinancing and redemption of the $500 million notes due December 2019 and $500 million notes due January 2020; monitor liquidity, covenant compliance and leverage targets.
- Whether Line 901 liabilities, insurance recoveries and other environmental or legal claims remain within current estimates.
- Whether operating cash flow supports planned capital spending and distributions, including the sustainability of PAA’s distribution-coverage and leverage objectives.