PLAINS GP HOLDINGS, L.P. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; filed November 7, 2014. Unless otherwise noted, amounts are in millions. PAGP consolidates PAA and its subsidiaries, although PAGP held an approximately 22.4% limited-partner interest in AAP at quarter-end; substantial earnings and capital therefore belong to noncontrolling interests.
Financial performance and position
- Q3 revenue: $11.127 billion, up 4% from $10.703 billion. Operating income was $403 million versus $296 million; net income was $311 million versus $236 million. Net income attributable to PAGP was $16 million versus $1 million. Q3 basic and diluted earnings were $0.12 per Class A share; the filing does not present a comparable 2013 per-share figure.
- Nine-month results: Revenue was $34.005 billion, up 8%. Operating income declined to $1.257 billion from $1.332 billion; net income fell to $958 million from $1.070 billion. PAGP-attributable net income was $45 million versus $3 million; earnings per Class A share were $0.33 for 2014.
- Margins: Approximate consolidated operating margin was 3.6% in Q3 2014 versus 2.8% in Q3 2013, and 3.7% for the first nine months of 2014 versus 4.2% in 2013. These consolidated figures include PAA and should not be read as PAGP-only operating margins.
- Segment profit: Q3 total segment profit increased 30% to $530 million. Transportation rose 17% to $231 million; Facilities was essentially flat at $147 million; Supply and Logistics rose to $152 million from $64 million. For nine months, segment profit was nearly flat at $1.627 billion versus $1.640 billion: Transportation improved 26% to $658 million, Facilities declined 2% to $435 million, and Supply and Logistics declined 21% to $534 million.
- Cash flow and investment: Nine-month operating cash flow was $1.266 billion, down from $1.589 billion. Investing cash outflow was $1.664 billion, including $1.424 billion of property, equipment and other additions. Financing provided $391 million; cash ended at $35 million, down from $43 million at year-end 2013. Capital expenditures were $1.713 billion, including $1.552 billion for growth projects and $151 million for maintenance.
- Debt and liquidity: Total debt was $9.120 billion, up from $8.343 billion at December 31, 2013; short-term debt was $976 million. Cash was $35 million, and the working-capital deficit was $408 million. Management reported approximately $2.590 billion of available liquidity and covenant compliance at quarter-end. PAA issued $700 million of 4.70% notes due 2044 and $750 million of 3.60% notes due 2024 during 2014.
- Distributions: PAGP declared a Q3 distribution of $0.19075 per Class A share, payable November 14, 2014. Nine-month cash distributions to Class A shareholders were $65 million; distributions to noncontrolling interests were $959 million.
Material changes and management commentary
- Management attributed Transportation growth to rising North American crude production, higher throughput and recently completed expansion projects. Transportation volumes increased 13% in Q3 and 9% for the nine-month period.
- Supply and Logistics’ strong Q3 comparison included an $86 million favorable year-over-year swing in certain derivative gains and losses. For nine months, segment profit decreased, reflecting weaker NGL marketing margins and fewer opportunities to capture above-baseline crude oil margins, particularly in Q1. Management said continued infrastructure development could normalize crude logistics margins.
- Severe first-quarter cold weather increased natural-gas storage deliverability costs and contributed to a $37 million inventory write-down. Higher depreciation, interest and income-tax expense also weighed on nine-month earnings.
- 2014 projected expansion capital was $1.950–$2.150 billion, subject to timing and scope adjustments. The filing does not provide full-year earnings or distribution guidance.
Outlook, risks and contingencies
- Management stated it expected sufficient liquidity to meet operating needs, debt service, contingencies and anticipated capital expenditures, while warning that prolonged financial-market disruption or adverse energy-price volatility could materially affect results and liquidity.
- Subsequent to quarter-end, PAA agreed to acquire Oxy’s 50% interest in BridgeTex for $1.075 billion. Closing was conditional, including completion by December 31, 2014 of an underwritten secondary offering in which Oxy would sell part of its PAGP interest. PAA intended initially to use commercial paper and, long term, to fund at least 55% with equity and excess cash flow. The agreement could be terminated if the offering was not completed by the deadline.
- Environmental liabilities were reserved at $87 million, undiscounted, at September 30. The filing notes potential additional costs and describes past pipeline releases, including the Kemp River releases; cleanup and remediation were ongoing, and future penalties were possible. Management did not expect ordinary-course litigation to have a material adverse effect.
- Key exposures include commodity prices and basis differentials, interest rates, Canadian-dollar exchange rates, counterparties, weather, project execution, environmental events, access to capital and the ability to sustain distributions. Derivatives are used for risk management, but fair values and cash-flow effects can vary with market conditions.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the period. The filing reported no off-balance-sheet arrangements.
Investor verification priorities
- Confirm the BridgeTex transaction’s closing conditions, secondary-offering status, funding mix and expected effect on leverage and distributions.
- Assess whether operating cash flow can support the expansion program, distributions and debt service, given the working-capital deficit and $9.120 billion of debt.
- Separate underlying Supply and Logistics performance from derivative mark-to-market effects, and track NGL margins and crude-market differential normalization.
- Review project spending, completion schedules and returns, including the stated $1.950–$2.150 billion 2014 expansion-capital range.
- Monitor environmental remediation costs, regulatory outcomes and any additional pipeline incidents or penalties.