Plains All American Pipeline, L.P. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unless stated otherwise, financial amounts are in millions of U.S. dollars. Per-unit figures reflect the October 1, 2012 two-for-one unit split.
Business context
Plains transports, stores, terminals and markets crude oil and refined products and operates natural gas liquids and natural gas storage businesses. Its segments are Transportation, Facilities, and Supply and Logistics. The April 2012 BP Canada Energy Company acquisition expanded its NGL pipelines, storage, fractionation and processing operations.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $9,354 | $8,837 | $28,358 | $25,390 |
| Operating income | $247 | $357 | $1,023 | $939 |
| Net income | $173 | $288 | $797 | $706 |
| Net income attributable to Plains | $165 | $281 | $774 | $688 |
| Diluted net income per limited partner unit | $0.27 | $0.74 | $1.70 | $1.76 |
| Adjusted EBITDA | $502 | $414 | $1,497 | $1,128 |
| Implied distributable cash flow | $360 | $310 | $1,094 | $807 |
Operating cash flow was $880 for the first nine months, compared with $1,752 in 2011; the filing attributes the decline principally to working-capital changes and higher crude oil and NGL inventory, while 2011 cash flow benefited from inventory liquidation. Investing cash outflow was $2,376, including $1,537 for acquisitions and $852 for property and other additions. Financing provided $1,501. Cash ended the period at $32.
Total debt was $6,645 at September 30, 2012, versus $5,199 at year-end 2011. Current liabilities exceeded current assets by approximately $73. Available liquidity, including cash and unused credit facilities, was approximately $2,434; the partnership reported compliance with its debt covenants. A debt-to-EBITDA or other leverage ratio is not clearly provided in the filing text.
Changes versus the prior comparable period
- For the first nine months, Plains-attributable net income rose 13% and adjusted EBITDA rose 33%, but diluted earnings per unit fell from $1.76 to $1.70, reflecting a larger weighted-average unit count and changes in income allocation.
- Q3 Plains-attributable net income fell 41%, and operating income declined, despite higher revenue. Depreciation and amortization included approximately $125 of impairment losses, primarily on the Pier 400 terminal project, which Plains abandoned.
- Nine-month segment profit increased 24% in Transportation and 33% in Facilities. Supply and Logistics profit rose 17% for the nine months but fell 21% in Q3, with Q3 profit per barrel down 32% year over year.
- Debt increased following the BP NGL acquisition and related funding. Plains issued $1,250 of senior notes and equity during 2012; the $500 of 4.25% notes due September 2012 was repaid using credit facilities.
Outlook, commentary and risks
- Management forecast 2012 expansion capital expenditures of $1,100–$1,250 and maintenance capital expenditures of $160–$170. Identified growth projects included Eagle Ford, Spraberry, Rainbow II and terminal expansions. Portions of the jointly owned Eagle Ford Pipeline system were expected to enter service in Q4 2012, with the remainder expected in the first half of 2013.
- Management cited growing North American crude and liquids production, asset utilization, fee-based growth and favorable crude differentials as positive drivers. It cautioned that enhanced Supply and Logistics margins may normalize as transportation infrastructure develops; margins also vary with market conditions, volatility, weather and NGL demand.
- The BP NGL purchase price was approximately $1.68 billion. Purchase accounting remained preliminary, and integration, acquired-asset costs and performance are important execution considerations. The general partner agreed to reduce incentive distributions in connection with the acquisition through February 2014 and at a lower level thereafter.
- A two-for-one common-unit split took effect October 1, 2012. The November 2012 quarterly distribution was declared at $0.5425 per unit, equivalent to an annualized $2.17, approximately 9% above the prior-year rate.
- The June 2012 Rangeland Pipeline release involved approximately 3,000 barrels. Estimated cleanup and remediation costs were approximately $53 before insurance; the remaining gross liability was approximately $19, with a $43 insurance receivable recorded. Total environmental reserves were approximately $106, partly offset by $50 of expected insurance or third-party recoveries.
- Plains continued to self-insure hurricane property-damage risk during 2012. Other disclosed risks include commodity and basis changes, counterparty and financing access, acquisition integration, regulatory and environmental exposure, and Canadian-dollar fluctuations. Pemex litigation seeks damages and penalties from a subsidiary; the filing does not provide a clear quantified exposure.
Important facts for investors to verify
- Whether the BP NGL acquisition and planned expansion projects deliver the expected operating contribution, on schedule and within capital budgets.
- Whether Supply and Logistics margins normalize, and how inventory writedowns and derivative mark-to-market effects affect reported versus adjusted results.
- How operating cash flow and distribution coverage develop as inventory and working-capital needs change, given the working-capital deficit and increased debt.
- Whether the Rangeland insurance recovery is realized as expected and whether environmental reserves adequately cover remediation and other liabilities.
- The final purchase accounting for BP NGL, the remaining effect of the Pier 400 impairment, and any developments or estimable exposure in the Pemex litigation.