Business context and reporting period
Plains GP Holdings, L.P. (PAGP) filed this unaudited Form 10-Q for the quarter ended September 30, 2015. PAGP is a holding partnership whose operations are conducted through Plains All American Pipeline, L.P. (PAA) and subsidiaries; it consolidates those businesses. Operations span Transportation, Facilities, and Supply and Logistics.
Financial performance and position
Amounts are in millions of dollars except per-share data and where noted.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $5,551 | $11,127 | $18,156 | $34,005 |
| Operating income | $332 | $403 | $908 | $1,257 |
| Net income | $228 | $311 | $593 | $958 |
| Net income attributable to PAGP | $32 | $16 | $93 | $45 |
| Basic and diluted net income per Class A share | $0.14 | $0.12 | $0.42 | $0.33 |
| Operating cash flow | Not separately stated for quarter | $1,213 | $1,266 |
- Segment profit: Q3 totaled $487, down 8%; nine-month total was $1,371, down 16%. Transportation profit rose 10% for the quarter and 3% year to date; Facilities was roughly flat; Supply and Logistics fell 43% and 52%, respectively.
- Cash flow and investment: Nine-month operating cash flow was $1.2 billion. Investing used $2.1 billion, including $1.6 billion for property, equipment and other additions and $213 million for unconsolidated entities. Financing provided $480 million.
- Liquidity: Cash was $25 at September 30, versus $404 at year-end 2014. Working capital deficit was $519. Management reported approximately $3.2 billion of available liquidity, including credit and commercial-paper capacity.
- Debt: Total debt was $11.2 billion, up from $10.6 billion at year-end 2014. Long-term debt was $10.5 billion and short-term debt $681. PAA issued $1.0 billion of 4.65% notes due 2025 and repaid $550 million of notes maturing in 2015. PAGP/PAA and AAP reported compliance with debt covenants.
- Distributions: PAGP declared a quarterly distribution of $0.231 per Class A share, payable November 13, 2015, described as a 21.1% year-over-year increase. Approximately $1.2 billion in distributions were paid to Class A shareholders and noncontrolling interests during the first nine months.
Material changes versus prior comparable periods
- Revenue declined 50% in Q3 and 47% for the nine months, primarily reflecting lower commodity prices and reduced Supply and Logistics sales values. Supply and Logistics segment profit fell sharply amid compressed crude differentials, greater competition, and lower unit margins.
- Consolidated net income declined 27% in Q3 and 38% year to date. PAGP-attributable income nevertheless increased to $32 from $16 for Q3 and to $93 from $45 for nine months, partly reflecting a lower share of consolidated income attributable to noncontrolling interests and a larger average Class A share count.
- Operating cash flow declined modestly year over year. Capital investment increased to $2.1 billion from $1.7 billion for the nine-month period.
- Interest expense rose to $322 from $254 for nine months, reflecting higher average debt balances, partly offset by lower interest rates on some issuances. Depreciation and amortization increased to $327 from $294 as projects entered service.
- Other comprehensive loss was $518 for the nine months, primarily due to $469 of currency translation adjustments.
Outlook, commentary, risks and unusual items
- Capital plan: Management forecast 2015 expansion capital of $2.1–$2.3 billion and maintenance capital of $200–$220 million. It said most expansion spending was expected to benefit results from 2016 onward; the filing gives no specific earnings guidance.
- Market outlook: Management noted lower oil prices, slower North American production growth, compressed basis differentials, and increased competition could pressure volumes and margins, particularly in Supply and Logistics. Excess takeaway capacity and asset underutilization were additional risks. Management cautioned that distribution and cash-flow growth could be slower than otherwise expected.
- Line 901 incident: A May 2015 crude release in California led to pipeline shutdowns, remediation, investigations, claims and lawsuits. The company estimated aggregate costs of approximately $257 million, excluding lost revenue; $192 million of insurance recovery was recognized as probable. The remaining gross liability was $126 million. There was no established restart timeline for Lines 901 and 903, and potential additional claims, fines, penalties and costs remained uncertain.
- Other contingencies: Total environmental reserves were $197 million at September 30, compared with $82 million at year-end 2014; recorded insurance and indemnification receivables were $200 million. Other disclosed matters included a July Illinois pipeline release estimated to cost less than $10 million, pipeline-safety and environmental proceedings, and possible future penalties. Management stated it did not believe current legal proceedings would have a material adverse effect, but noted estimates could change.
- Other unusual operating factors: The company recorded a $25 million inventory valuation charge for the nine months, primarily related to NGL price declines. Supply and Logistics results also included unfavorable long-term inventory costing adjustments of $62 million for the period.
Important facts for investors to verify
- Progress, timing and final cost of the Line 901/903 response, including insurance recoveries, claims, regulatory actions and any pipeline restart.
- Whether projected 2015 expansion and maintenance capital spending is completed within the stated ranges and generates expected returns.
- Trends in crude oil differentials, production volumes, competition and Supply and Logistics segment margins.
- Debt levels, commercial-paper and credit-facility availability, covenant compliance, and the company’s capacity to fund capital spending and distributions.
- Sustainability of PAGP’s distribution and the extent to which cash available to PAGP depends on distributions received through AAP and PAA.