Plains GP Holdings, L.P. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial figures are unaudited and in U.S. dollars; amounts are in millions except per-share data. PAGP is a holding partnership whose cash-generating interests are in Plains All American Pipeline (PAA); substantially all consolidated assets and liabilities are those of PAA. Results therefore include significant noncontrolling interests.
Financial performance and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $8,253 | $8,080 | $16,628 | $16,478 |
| Operating income | $449 | $86 | $1,161 | $466 |
| Net income | $426 | $96 | $1,340 | $369 |
| Net income attributable to PAGP | $66 | $7 | $213 | $44 |
| Diluted net income per Class A share | $0.40 | $0.05 | $1.32 | $0.28 |
| Adjusted EBITDA (non-GAAP) | $783 | $505 | $1,643 | $1,096 |
Q2 operating margin was approximately 5.4%, compared with 1.1% a year earlier. This is calculated as operating income divided by revenue.
- Cash flow: For the six months, operating cash flow was $1,468, versus $1,013 in 2018. Investing cash outflow was $978, and financing cash outflow was $86. Cash and restricted cash ended at $470, up from $69 at year-end 2018.
- Capital spending: Six-month acquisition, expansion and maintenance capital totaled $860, including $695 of expansion capital and $118 of maintenance capital. Management expected full-year 2019 expansion capital of approximately $1.5 billion.
- Debt and liquidity: Total debt was $9,646 at June 30, versus $9,209 at year-end 2018. Senior notes were $8,945; short-term debt was $470. PAGP reported a $10 working-capital deficit and approximately $2,957 of available liquidity, including cash and available PAA facilities, subject to covenant compliance. PAA was in compliance with its covenants.
- Distributions: PAGP declared a quarterly distribution of $0.36 per Class A share, payable August 14, 2019. Aggregate third-quarter distributions to Class A shareholders and noncontrolling interests were expected to be approximately $300.
Changes versus the prior comparable period
- Revenue increased 2% in Q2 and 1% for the first half. Q2 operating income rose to $449 from $86; first-half net income attributable to PAGP rose to $213 from $44.
- Management cited stronger Supply and Logistics results, including favorable crude oil differentials and NGL margins, and higher Transportation volumes, especially in the Permian Basin. Q2 segment Adjusted EBITDA was $410 in Transportation, $172 in Facilities and $200 in Supply and Logistics; Supply and Logistics was negative $26 in Q2 2018.
- Six-month net income included a $267 noncash gain from establishing the Capline equity-method investment. The prior-year six-month period included an $81 net gain on asset sales and impairments. These items affect comparisons.
- Derivative activity was substantially more favorable: Q2 gains on derivatives recognized in net income were $52, compared with losses of $339 in Q2 2018. Adjusted EBITDA excludes selected timing-related derivative and inventory effects, among other items.
- Debt increased by $437 from year-end, while cash and restricted cash increased by $401. The company adopted new lease accounting in 2019, recording lease right-of-use assets and liabilities; this adoption did not materially affect earnings or cash flows.
Outlook, commentary and risks
- Management forecast approximately $1.5 billion of 2019 expansion capital, primarily for Permian Basin projects, expected to be funded with retained cash flow, asset-sale proceeds or debt. Major projects included Permian takeaway and related infrastructure.
- PAA reported completion of its leverage reduction plan and lowered its targeted long-term debt-to-Adjusted-EBITDA ratio to 3.0x–3.5x. It set a sustainable minimum annual distribution coverage target of 130%; future common-unit distribution increases are contingent on leverage and coverage targets and annual review.
- Wink to Webster was targeted to begin operations in the first half of 2021, with capacity exceeding 1 million barrels per day; PAGP’s interest fell from 20% to 16% after additional partners joined after quarter-end. Red Oak’s initial Cushing-to-Gulf Coast service was targeted as early as Q1 2021, subject to permits and approvals.
- Line 901 incident: The company estimated total costs incurred or expected at approximately $380, with a remaining gross liability of $88 and a recognized insurance receivable of approximately $67. It warned actual costs could materially exceed estimates. The pipeline and most of Line 903 remained out of service; no restart timetable was established. Additional claims, regulatory actions, fines or penalties remain possible. PAA had paid approximately $3.35 in fines and penalties under its 2019 sentence; further legal proceedings continued.
- Other risks highlighted include commodity differentials and market structure, throughput and production levels, competition and capacity overbuild, project execution and permitting, counterparty credit, access to financing, environmental liabilities, currency movements and weather or operational disruptions.
- Management said liquidity was sufficient for anticipated commitments, but cautioned that prolonged financial-market disruption or energy-price volatility could adversely affect financial condition, results or cash flow. No full-year earnings guidance was provided in the supplied filing text.
Important facts for investors to verify
- How much reported earnings and cash generation are recurring operating performance versus the $267 Capline gain, derivative timing effects, and other selected adjustments.
- Whether the $1.5 billion expansion-capital plan, including joint-venture projects, stays on budget and on schedule, and whether expected project volumes and returns materialize.
- Debt maturities, refinancing needs, facility availability and covenant headroom, particularly given the reported $9.6 billion of debt and working-capital deficit.
- Changes in the Line 901 liability, insurance recoveries, litigation and regulatory exposure, and any restart decisions for affected pipelines.
- Whether PAA sustains its targeted leverage and 130% distribution coverage, and whether distributions remain supported by cash flow after capital spending.