Plains GP Holdings, L.P. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. PAGP is a holding partnership whose consolidated results primarily reflect Plains All American Pipeline, L.P. (PAA) and its subsidiaries. Amounts below are in U.S. dollars; financial-statement amounts are in millions unless noted.
Financial results and key metrics
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $5,942 | $11,684; down 49% |
| Operating income | $367 | $492; down 25% |
| Net income | $262 | $372; down 30% |
| Net income attributable to PAGP | $31 | $14 |
| Basic and diluted earnings per Class A share | $0.14 | $0.11 |
| Operating cash flow | $729 | $817 |
| Capital expenditures and acquisitions | $700 | $609 |
| Cash and cash equivalents, quarter-end | $460 | $404 at December 31, 2014 |
| Total debt, quarter-end | $9,875 | $10,585 at December 31, 2014 |
- Revenue fell mainly because lower crude oil and NGL prices reduced Supply and Logistics sales and related purchases. That segment’s profit declined 48% to $130; management also cited compressed crude-oil differentials and unfavorable derivative and inventory effects.
- Transportation segment profit rose 17% to $241, supported by higher throughput, expansion projects and tariff changes. Facilities segment profit fell 8% to $142.
- Consolidated operating margin was approximately 6.2%, versus 4.2% in Q1 2014; revenue is substantially affected by high-volume, low-margin commodity activities. No separate consolidated margin measure is presented as a key performance measure.
- Interest expense increased to $104 from $81, primarily reflecting debt issued in 2014. Depreciation and amortization rose to $108 from $96. Income tax expense declined to $34 from $57, including a deferred tax benefit related to Canadian derivative mark-to-market losses.
- Quarter-end working capital deficit was $77. Management reported approximately $4.4 billion of available liquidity, including $460 million cash and available borrowing capacity. PAA and AAP were in compliance with credit-agreement covenants.
Material changes and capital allocation
- Supply and Logistics segment profit decreased from $249 to $130, while average daily segment volumes increased 9%. WTI prices ranged from $43 to $54 per barrel in Q1 2015, compared with $92 to $105 in Q1 2014.
- Management attributed a $93 million unfavorable year-over-year swing in gains and losses from certain derivative activities, net of inventory valuation adjustments, to the segment comparison. It also cited a $38 million reduction in the value of long-term crude oil and NGL inventory pools.
- Transportation volumes increased 11%; segment profit benefited from increased production-related throughput and equity earnings, including BridgeTex. Facilities total volumes increased 2%, while lower rail activity and Canadian-dollar effects weighed on results.
- PAA issued approximately 22.1 million common units in Q1, generating about $1.1 billion net proceeds, including approximately $1.0 billion from an underwritten offering. The proceeds supported debt repayment and general purposes, including the capital program.
- PAGP’s Class A distribution was declared at $0.222 per share, payable May 15, 2015, an approximately 30.2% year-over-year increase. PAA’s distribution was raised to $0.6850 per limited partner unit.
Outlook, risks and contingencies
- Management forecast 2015 expansion capital of $2.10–$2.25 billion and maintenance capital of $205–$225 million. Projects include Permian Basin, Fort Saskatchewan, rail terminals and several pipelines. Management expected most expansion spending to contribute to growth in 2016 and beyond.
- The filing does not provide a specific earnings or cash-flow forecast. Management stated it believed liquidity was sufficient for operating needs, debt service, contingencies and planned capital spending, while warning that prolonged financial-market disruption or adverse energy-price volatility could materially affect results and liquidity.
- Risk factors include commodity prices and market structure, throughput and production trends, project execution and financing access, counterparty credit, Canadian-dollar movements, weather, and environmental or regulatory matters. Derivative exposures include commodity, interest-rate and currency risks.
- Environmental liabilities were estimated at $75 million undiscounted at March 31, 2015. The filing notes possible additional remediation costs or penalties. A Canadian regulator had imposed a CAD $76,000 penalty related to pipeline compliance; further penalties were possible. On April 30, 2015, the EPA issued a notice alleging Clean Air Act violations at the Bakersfield rail facility; no penalty had been assessed as of the filing.
- Q1 included a $24 million inventory valuation charge, primarily for NGL inventory, substantially offset by a portion of a derivative mark-to-market gain recognized in Q4 2014. Foreign-currency translation contributed to a $376 million other comprehensive loss, largely reflecting Canadian operations.
Most important facts for investors to verify
- Whether the lower Supply and Logistics segment profit and adverse derivative/inventory effects persist or reverse as commodity prices and differentials change.
- Progress, costs, funding and expected returns for the $2.10–$2.25 billion expansion program.
- Liquidity and refinancing plans for PAA senior notes of $150 million due June 2015 and $400 million due September 2015.
- Ability to sustain the increased PAGP distribution, given reliance on distributions from AAP/PAA and the scale of capital commitments.
- Developments in the Bakersfield EPA matter, Canadian pipeline compliance, and remediation reserves relative to eventual costs.