Plains GP Holdings, L.P. — Q1 2020 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. PAGP is a holding partnership whose cash-generating assets are its interests in Plains AAP and Plains All American Pipeline (PAA). Its consolidated statements largely reflect PAA’s operating business, which provides crude oil, NGL and natural gas transportation, storage and logistics services.
Financial results and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $8.269 billion | $8.375 billion |
| Net income/(loss) | $(2.692) billion | $914 million |
| Net income/(loss) attributable to PAGP | $(581) million; $(3.18) per Class A share | $147 million; $0.92 per share |
| Adjusted EBITDA, non-GAAP | $794 million | $861 million |
| Cash from operating activities | $889 million | $1.032 billion |
| Cash and restricted cash | $162 million | $84 million at Dec. 31, 2019 |
| Total debt | $9.781 billion | $9.691 billion at Dec. 31, 2019 |
| Total partners’ capital | $11.186 billion | $14.485 billion at Dec. 31, 2019 |
Reported operating loss was $2.775 billion. The filing attributes the sharp GAAP loss primarily to non-cash charges: a $2.515 billion goodwill impairment that eliminated all goodwill, approximately $489 million of impairments on held-and-used long-lived assets and investments, $167 million of held-for-sale impairments, and a $232 million inventory valuation charge. Adjusted EBITDA margin was approximately 9.6% of revenue, versus 10.3% a year earlier; this is a simple calculation from the filing’s non-GAAP Adjusted EBITDA and GAAP revenue.
Cash used in investing was $610 million, including $308 million for the Felix Midstream acquisition and $245 million of property, equipment and other additions. Cash used in financing was $191 million. The Partnership reported a $286 million working-capital deficit but approximately $2.520 billion of liquidity, including $2.480 billion of available facility capacity and $40 million of cash. Facility availability is subject to covenant compliance; PAA reported compliance at quarter-end.
Material changes versus the prior comparable period
- Revenue declined about 1%, while Adjusted EBITDA fell 8%. Transportation Adjusted EBITDA increased 11% to $442 million and Facilities increased 14% to $210 million; Supply and Logistics fell 49% to $141 million.
- Supply and Logistics results weakened primarily on less favorable crude oil differentials, weaker NGL spreads and lower NGL sales volumes. Transportation volumes rose 12%, while Facilities total volumes rose 2%.
- Operating cash flow decreased to $889 million from $1.032 billion. Interest expense rose to $108 million from $101 million; depreciation and amortization rose to $169 million from $136 million.
- In Q1, PAGP acquired a Delaware Basin crude oil gathering system for approximately $300 million, sold a 10% interest in Saddlehorn for approximately $78 million, and recognized a $21 million gain on that sale.
Outlook, risks, contingencies and unusual items
- Management described severe uncertainty from COVID-19, demand destruction and excess crude supply. It cited industry estimates that Q2 2020 global crude demand could be 20%–25% below Q2 2019 and expected storage at key hubs to fill by June. Management warned impacts could extend into 2021. Revised 2020 guidance was issued May 5, 2020, but the guidance figures are not provided in the filing text supplied here.
- Actions announced in April included reducing the 2020–2021 capital program by $750 million (33%) to approximately $1.55 billion, targeting approximately $1.1 billion of 2020 expansion capital, cutting PAA common and PAGP Class A distributions payable in May by 50%, reducing costs and pursuing asset sales. PAGP’s May distribution was reduced to $0.18 per share from $0.36. Management cautioned that planned actions may not be completed or sufficient.
- Asset sales included approximately $163 million of NGL terminals sold in April and a planned $195 million sale of Los Angeles Basin terminals, expected to close in the second half of 2020 subject to conditions. Red Oak’s pipeline project was deferred; if it does not proceed, impairment of the $54 million carrying value (about $122 million including estimated Q2 committed costs) may result.
- Line 901 environmental and legal exposure remains material. The company estimated aggregate incident costs of approximately $400 million and a remaining gross liability of $90 million at March 31. A proposed Consent Decree would require $24 million of civil penalties, $22.325 million for natural-resource damages and injunctive relief, subject to court approval. The filing warns actual costs could exceed estimates.
- Other key risks include lower customer production and throughput, counterparty credit or performance failures, market and hedging disruption, reduced access to financing, asset-sale execution and environmental liabilities. Management said it had not experienced material constraints to essential operations from COVID-19 at the filing date.
Important facts for investors to verify
- Review the May 5 revised guidance and subsequent results against assumptions for demand, storage capacity, production and recovery timing.
- Track liquidity, facility availability, covenant compliance, debt maturities and the ability to refinance debt, including the $600 million of senior notes due February 2021.
- Confirm execution and proceeds from announced asset sales and delivery of capital-program and cost reductions.
- Monitor distribution sustainability after the 50% reduction and the cash needs of PAGP, PAA and noncontrolling interests.
- Follow court approval and remaining claims, insurance recoveries and possible additional accruals relating to the Line 901 incident.
- Assess the assumptions behind the large non-cash impairments and any further impairment exposure, particularly for Red Oak and other energy infrastructure assets.