Business context and reporting period
Plains GP Holdings, L.P. (PAGP) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. PAGP is a holding partnership whose results largely reflect Plains All American Pipeline, L.P. (PAA), an oil and NGL midstream operator. Unless otherwise noted, financial amounts below are consolidated and in millions of dollars.
Financial results and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $8,080 | $6,078 | $16,478 | $12,745 |
| Operating income | $86 | $256 | $466 | $844 |
| Net income | $96 | $174 | $369 | $575 |
| Net income attributable to PAGP | $7 | $24 | $44 | $65 |
| Basic and diluted earnings per Class A share | $0.05 | $0.16 | $0.28 | $0.47 |
Q2 revenue growth reflected higher Supply and Logistics activity and commodity prices, but the increase in revenue did not translate into higher operating income. Management’s non-GAAP Adjusted EBITDA was $505 million in Q2, up 12% from $450 million, and $1,096 million for the first half, up 14% from $960 million. Transportation segment adjusted EBITDA rose 21% in Q2 to $360 million; Facilities fell 5% to $171 million; Supply and Logistics reported negative $26 million, versus negative $28 million.
Operating cash flow was $1,013 million for the first half, down from $1,459 million a year earlier. Investing activities used $506 million, compared with $1,654 million, while financing activities used $507 million, compared with providing $194 million. Cash ended the period at $37 million, versus $40 million at year-end 2017.
At June 30, total debt was $9,909 million, broadly unchanged from $9,920 million at December 31, 2017. Current liabilities exceeded current assets by approximately $1.3 billion. Management reported $3.035 billion of available liquidity, including cash, subject to covenant compliance; this included a $1.0 billion 364-day revolving facility due to mature in mid-August 2018. PAA was in compliance with its debt covenants at quarter-end. The balance sheet reported total assets of $27.1 billion and partners’ capital of $12.2 billion.
Material changes versus prior comparable periods
- First-half net income declined $206 million year over year. Management attributed the largest adverse comparison to a $511 million swing from derivative mark-to-market results: losses in 2018 versus gains in 2017.
- Derivative activity produced a $339 million loss in Q2 2018, compared with a $93 million gain in Q2 2017; first-half losses were $391 million, versus gains of $182 million. These results notably affected GAAP earnings, while specified timing-related derivative effects are excluded from Adjusted EBITDA.
- Transportation performance strengthened with higher Permian Basin volumes and expansion projects; total Transportation volumes increased 12% in Q2. Facilities results were slightly lower, while Supply and Logistics margins remained exposed to competitive lease-gathering conditions and market structure.
- Interest expense fell to $217 million for the first half from $256 million, reflecting a lower average debt balance after debt repayments. Depreciation and amortization also declined, partly due to $81 million in net gains on 2018 asset sales recorded in that line.
Outlook, commentary, risks and unusual items
- Management expected 2018 expansion capital of approximately $1.95 billion, principally focused on Permian Basin infrastructure; $832 million had been invested in the first half. The company cited increased project demand, accelerated construction, higher costs, and steel tariffs affecting Cactus II.
- PAGP set a 2018 divestiture target of $700 million and had received $426 million by June 30. It said additional transactions were being pursued but gave no assurance they would close.
- The quarterly PAGP Class A distribution was $0.30 per share, unchanged from the prior three quarters but approximately 45% below the $0.55 paid in August 2017. Management stated an August 14, 2018 payment date.
- The Line 901 2015 oil release remains a major contingency. The company estimated aggregate incident costs at approximately $335 million and reported a remaining gross liability of $76 million at June 30, partly offset by a recognized $40 million insurance receivable. Related investigations and litigation continued; the Line 901 and most of Line 903 remained out of service, with no restart timeline established. Management warned costs could exceed current estimates.
- Environmental liabilities, including Line 901, totaled $138 million at quarter-end. The filing notes that future releases and remediation costs could be significant and that insurance may not fully cover losses.
- A 2018 FERC policy change could affect future pipeline tariff escalations from July 2021 onward, depending on the commission’s next index review. PAGP said its current cost-of-service rates were not directly affected.
- Commodity, interest-rate and Canadian-dollar exposures are managed with derivatives, but mark-to-market changes, margin requirements, market volatility, project execution, counterparties, and access to capital remain risks. Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether derivative-related volatility continues to materially separate GAAP earnings from Adjusted EBITDA, and the assumptions underlying the non-GAAP adjustments.
- Availability of liquidity after the 364-day facility maturity, and continued covenant compliance and refinancing capacity.
- Execution, financing, and returns of the $1.95 billion 2018 expansion program, including Permian projects and Cactus II costs.
- Completion and proceeds from planned divestitures relative to the $700 million target.
- Development of Line 901 litigation, regulatory proceedings, insurance recoveries, and potential costs beyond recorded reserves.
- Whether operating cash generation supports capital spending and distributions, including the lower PAGP distribution level.