Plains All American Pipeline, L.P. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This annual filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars unless noted.
Business context
PAA owns and operates crude oil and NGL pipelines, gathering systems, storage and terminal facilities, and related logistics assets in the United States and Canada. Its three segments are Transportation, Facilities, and Supply and Logistics. The filing describes a difficult midstream market shaped by lower commodity prices, reduced producer activity, excess infrastructure capacity, compressed differentials, and intense competition for uncommitted volumes.
Financial performance and liquidity
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $20.182 billion | $23.152 billion | Down 13% |
| Operating income | $994 million | $1.262 billion | Down 21% |
| Net income attributable to PAA | $726 million | $903 million | Down 20% |
| Basic net income per common unit | $0.43 | $0.78 | Down 45% |
| Adjusted EBITDA (non-GAAP) | $2.169 billion | $2.213 billion | Down 2% |
| Implied distributable cash flow (non-GAAP) | $1.414 billion | $1.474 billion | Down 4% |
| Net cash from operating activities | $726 million | $1.344 billion | Down 46% |
| Total debt at year-end | $11.839 billion | $11.374 billion | Up $465 million |
Reported gross margin was $1.273 billion, compared with $1.540 billion in 2015. Interest expense rose to $467 million from $432 million; depreciation and amortization increased to $494 million from $432 million. Cash and cash equivalents were $47 million, and working capital was negative $392 million at year-end. Reported available liquidity was approximately $2.414 billion, subject to covenant compliance. Of year-end debt, approximately $10.2 billion was long-term and $1.7 billion short-term; short-term borrowings included $410 million for margin requirements.
Segment adjusted EBITDA was $1.141 billion for Transportation (up 8%), $667 million for Facilities (up 13%), and $359 million for Supply and Logistics (down 37%). Supply and Logistics weakness reflected competition, reduced volumes in some areas, compressed margins, and less favorable market conditions. Revenue fell largely as lower crude oil and NGL prices reduced the reported value of high-volume commodity sales.
Implied DCF of $1.414 billion was below $1.565 billion of distributions paid, a reported $151 million shortfall. Distributions declared per common unit were $2.65 for 2016 versus $2.76 for 2015. The quarterly common distribution was reduced to $0.55 from $0.70; the $0.55 distribution for fourth-quarter 2016 was paid in February 2017.
Fourth-quarter results
Fourth-quarter revenue was $5.952 billion, compared with $4.996 billion in fourth-quarter 2015. Net income attributable to PAA was $126 million versus $247 million, and basic net income per common unit was $0.14 versus $0.24. Quarterly results were volatile: second-quarter 2016 included a basic loss of $0.20 per common unit, while the third quarter reported $0.40 per unit.
Material changes and unusual items
- In November 2016, PAA completed simplification transactions that eliminated incentive distribution rights and the economic rights of the 2% general partner interest. PAA issued AAP approximately 245.5 million common units and assumed $642 million of AAP debt. Management said the changes lowered the incremental cost of equity and improved alignment and credit profile.
- PAA raised approximately $1.6 billion net from Series A preferred units and approximately $805 million net from common-unit sales in 2016. The preferred units carry cumulative distributions of $2.10 annually per unit, rank senior to common units, and are generally convertible after two years.
- Asset sales and joint-venture transactions generated approximately $550 million of net cash proceeds in 2016. Further sales were contracted or expected to close in the first half of 2017; completion and proceeds remain subject to closing conditions.
- Cash provided by operations was pressured by weaker earnings, inventory growth, and higher derivative margin balances. PAA spent $1.405 billion on expansion capital and $186 million on maintenance capital in 2016.
- PAA recorded $80 million of non-cash impairment losses on rail and terminal assets, $33 million of costs for discontinued capital projects, and an $18 million charge for assets taken out of service. Asset sales and joint-venture formations produced approximately $100 million of net gains included in depreciation and amortization.
- Derivative and inventory-related selected items materially affected comparisons. Management’s adjusted measures exclude selected items and are non-GAAP; they should not be treated as substitutes for reported results.
Outlook, management commentary, and risks
Management expected challenging conditions to persist in the near term, while anticipating improving market conditions and lower-48 production growth in the latter half of 2017 and into 2018. That outlook depended partly on whether OPEC and participating non-OPEC countries implemented targeted production cuts. PAA cautioned that recovery, volume growth, improved differentials, and targeted project returns were not assured.
- PAA planned approximately $800 million of 2017 expansion capital, primarily for fee-based Transportation and Facilities projects. Management expected limited 2017 contributions, with growth benefits principally in 2018 and beyond.
- Management intended to end 2017 with long-term debt at or below year-end 2016 levels, using asset-sale proceeds, equity issuances, and retained cash flow to fund the capital program. It warned leverage could remain above its target range in the near term.
- In February 2017, PAA acquired the Alpha Crude Connector gathering system for approximately $1.215 billion, initially funded with credit-facility borrowings. This post-year-end acquisition increases the importance of planned financing and asset sales.
- Moody’s placed PAA’s investment-grade rating under review for downgrade in late January 2017. A downgrade could increase borrowing costs, constrain capacity, and reduce supplier and counterparty open credit.
- The 2015 Line 901 California pipeline release remained a major contingency. PAA estimated aggregate costs of approximately $280 million, with $75 million of gross liability remaining at year-end and $49 million of insurance receivable recognized. Criminal charges, civil claims, regulatory investigations, and potential additional fines or costs remained unresolved; actual costs could exceed estimates.
- Other key risks include production and throughput declines, overbuilt competing infrastructure, customer and counterparty credit exposure, commodity and interest-rate volatility, environmental and pipeline-safety liabilities, regulatory changes, project delays, and limited insurance coverage. PAA reported that three customers accounted for 18%, 14%, and 11% of 2016 revenue, respectively.
Important facts for investors to verify
- Whether operating cash flow and distributable cash flow improve enough to cover common and preferred distributions, maintenance capital, and debt service.
- Progress against the 2017 asset-sale plan and debt-reduction target, including closing conditions and realized proceeds.
- Financing, integration, and expected returns for the $1.215 billion Alpha Crude Connector acquisition and the planned 2017 expansion program.
- Rating-agency decisions, leverage covenant headroom, and the cost and availability of credit and open supplier terms.
- Developments in the Line 901 litigation, investigations, insurance recoveries, and environmental reserve estimates.
- Whether volumes, segment margins, and market conditions recover as management anticipates, particularly in Supply and Logistics.