Plains GP Holdings, L.P. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 26, 2021. PAGP is a holding partnership whose cash generation depends on distributions from Plains AAP and Plains All American Pipeline, L.P. (PAA). The consolidated financial statements include PAA’s operating business, so most operating and debt figures below reflect the consolidated Plains operations, not standalone PAGP.
Business context and operating results
PAA operates North American crude oil and natural gas liquids (NGL) pipelines, storage and processing facilities, and supply-and-logistics activities. Its three segments are Transportation, Facilities, and Supply and Logistics. COVID-19 sharply reduced petroleum demand and producer activity in 2020; the filing also reports historically volatile oil prices, including a WTI range from approximately negative $38 to $63 per barrel.
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $23.290 billion | $33.669 billion |
| Operating income/(loss) | $(2.383) billion | $1.980 billion |
| Net income/(loss) | $(2.440) billion | $2.062 billion |
| Net income/(loss) attributable to PAGP | $(568) million | $331 million |
| Basic net income/(loss) per PAGP Class A share | $(3.06) | $1.97 |
| Net cash from operating activities | $1.510 billion | $2.500 billion |
| Adjusted EBITDA (non-GAAP) | $2.555 billion | $3.232 billion |
Revenue fell 31% year over year. The net loss was principally driven by a $2.515 billion goodwill impairment, approximately $541 million of impairment losses on held-and-used assets, approximately $178 million of losses associated with asset sales and held-for-sale impairments, and $233 million of inventory valuation adjustments. PAGP reported no goodwill remaining at year-end. The filing does not present a single conventional operating margin measure; reported operating results were substantially affected by these impairments.
Segments and key financial measures
- Transportation: Segment Adjusted EBITDA was $1.616 billion, down 6%; average daily volumes were down 8% to 6.340 million barrels. Lower production, throughput, regional differentials and pipeline loss allowance revenue weighed on results.
- Facilities: Segment Adjusted EBITDA was $731 million, up 4%. Lower operating costs and increased crude storage activity offset weaker rail-terminal and NGL-related revenue.
- Supply and Logistics: Segment Adjusted EBITDA was $210 million, down 74%. Less favorable crude differentials, weaker NGL margins and derivative effects outweighed benefits from contango conditions. Volumes declined 4%.
Adjusted EBITDA is a company-defined non-GAAP measure; its reconciliations include selected adjustments such as derivative results, inventory costing and minimum-volume deficiencies. It should not be treated as GAAP earnings or cash flow.
Liquidity, debt and distributions
- Year-end total debt was $10.213 billion, compared with $9.691 billion in 2019; this included $831 million of short-term debt and $9.382 billion of long-term debt. PAGP reported $25 million of cash and cash equivalents and a $587 million working-capital deficit.
- Management reported approximately $2.182 billion of available liquidity, including cash and borrowing capacity under PAA facilities, after commercial-paper borrowings; access is subject to continued covenant compliance. PAA was in compliance at year-end.
- Operating cash flow declined 40% to $1.510 billion. Investing cash use was $1.093 billion; financing cash use was $430 million. Operating cash flow was affected by inventory growth, contango-related activity and derivative margin balances.
- PAA issued $750 million of 3.80% senior notes due 2030 and used proceeds, with cash on hand, to repay $600 million of 5.00% notes due 2021. The filing says approximately 97% of PAA’s long-term debt consisted of publicly traded senior notes.
- PAGP distributions were $0.90 per Class A share for 2020, versus $1.38 in 2019. Beginning with the May 2020 payment, PAA’s common-unit and PAGP’s Class A distributions were reduced 50% from the February 2020 level. The February 2021 payment was $0.18 per share, or $0.72 annualized.
Material changes, outlook and risks
- Management said excess pipeline capacity and producer capital discipline were expected to weigh on performance relative to pre-pandemic levels, with effects in 2021 expected to be more pronounced than in 2020. It expected drilling activity to remain below pre-pandemic levels, while noting that global petroleum demand could recover toward pre-COVID levels by year-end 2021; this was a forecast, not a guarantee.
- Management’s response emphasized balance-sheet flexibility: it reduced the 2020/2021 capital program by $950 million, or 41%; reduced annualized distributions by $525 million; completed approximately $450 million of asset sales; and pursued cost reductions. The 2021 investment-capital plan was $425 million, largely for contracted Transportation and Facilities projects, with limited expected contribution to 2021 results.
- Key risks include uncertain COVID-19 recovery, lower production and throughput, capacity overbuild and contract-renewal pressure, customer and counterparty credit risk, leverage and ratings exposure, commodity and derivative-market volatility, and dependence on PAA distributions for PAGP cash flow. PAA’s unsecured debt was rated investment grade by S&P and Fitch; Moody’s had downgraded it below investment grade in 2017.
- Additional risks include pipeline integrity and environmental liabilities, climate and other regulatory changes, project delays, cyber incidents, severe weather, insurance limitations and potential constraints on access to capital. The company self-insures certain risks, including cybersecurity, gradual pollution and named windstorms.
- Line 901 incident: The filing estimates aggregate costs incurred or expected of approximately $460 million. At year-end, the remaining gross liability was $86 million and a $90 million insurance receivable was recorded. The 2020 Consent Decree resolved regulatory-agency claims and required $24 million in civil penalties and $22.325 million for natural-resource damages; certain civil, derivative and other claims remained pending. Total costs could exceed the estimate.
- Canadian tax reassessments: Authorities issued notices totaling approximately $91 million, including penalties and interest, concerning transfer pricing for 2008–2015. PAGP had remitted approximately $64 million, disputed the reassessments and had not accrued a liability, stating it believed its position was more likely than not to be sustained.
Important facts for investors to verify
- Review PAA’s subsequent operating volumes, contract renewals and minimum-volume deficiency payments, particularly in regions with excess capacity.
- Track liquidity, short-term borrowings, covenant headroom, credit ratings and progress toward PAA’s targeted leverage profile.
- Assess whether cash flow supports the current distribution level and planned capital spending, given that PAGP depends on distributions flowing through PAA and AAP.
- Review impairment assumptions and any further asset or investment impairments; the 2020 goodwill write-off and other charges relied on forecasts of volumes, rates, costs and discount rates.
- Monitor resolution and cash costs of Line 901-related claims, insurance recoveries, and the Canadian tax reassessments.
The financial statements received an unqualified independent audit opinion, and the auditor also found internal control over financial reporting effective as of December 31, 2020. The auditor identified goodwill impairment and certain Transportation-segment pipeline impairment assessments as critical audit matters.