PLAINS GP HOLDINGS, L.P. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Comparisons are with Q1 2017 unless otherwise stated. PAGP is a holding partnership whose principal cash flows come indirectly from Plains All American Pipeline, L.P. (PAA), an oil and gas midstream infrastructure and logistics business. PAGP consolidates PAA and AAP; most consolidated assets and liabilities are theirs, and their creditors generally have no recourse to PAGP’s general credit.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total revenue | $8.398 billion | $6.667 billion |
| Operating income | $380 million | $589 million |
| Net income | $273 million | $402 million |
| Net income attributable to PAGP | $37 million | $41 million |
| Diluted net income per Class A share | $0.23 | $0.34 |
| Adjusted EBITDA (non-GAAP) | $592 million | $511 million |
| Net cash provided by operating activities | $520 million | $815 million |
| Capital expenditures | $343 million | $1.624 billion, including acquisition capital |
| Cash and cash equivalents | $26 million | $40 million at December 31, 2017 |
| Total debt | $9.824 billion | $9.920 billion at December 31, 2017 |
Revenue rose about 26%, largely reflecting higher commodity prices and increased Supply and Logistics activity. Operating income and net income fell despite higher segment adjusted EBITDA, principally because derivative-related gains were substantially lower than in Q1 2017. Operating cash flow also decreased, partly because Q1 2017 benefited from changes in hedging margin balances and inventory movements.
Segment adjusted EBITDA was $335 million in Transportation (up 23%), $185 million in Facilities (down 2%), and $72 million in Supply and Logistics (up 41%). Transportation benefited from higher Permian Basin volumes and expansion projects; Supply and Logistics improved with NGL activity and certain crude oil arbitrage opportunities. Facilities results were broadly flat.
Liquidity, debt and distributions
- Working capital deficit was $637 million. Management reported total available liquidity of approximately $3.173 billion, including cash and availability under PAA credit facilities and its commercial paper program. PAA was in compliance with its debt covenants at quarter-end.
- Q1 financing cash outflow was $310 million. The company reported net repayments of $156 million under PAA credit facilities and commercial paper during the quarter.
- PAGP’s May 2018 quarterly distribution was $0.30 per Class A share, unchanged from the prior two quarters but approximately 45% below the $0.55 paid in May 2017. The May payment was scheduled after quarter-end. PAA’s common-unit distribution was also $0.30 per unit.
- Outstanding letters of credit were $102 million at March 31, 2018.
Outlook, significant developments and risks
- Management expected 2018 expansion capital of approximately $1.4 billion, primarily focused on the Permian Basin. The company invested $298 million in expansion projects during Q1 and expected to fund the program with retained cash flow and asset-sale proceeds.
- Asset sales generated $83 million in Q1, with a further approximately $255 million received from transactions completed after quarter-end through May 1. The company targeted an additional $700 million from divestitures for its 2018 funding plan; completion of further sales was not assured.
- The 2015 Line 901 crude oil release remains a material contingency. The company estimated aggregate incident costs of approximately $335 million and reported an $87 million remaining gross liability, partly offset by a $46 million insurance receivable. Investigations, criminal charges, claims and litigation remained outstanding; additional costs could exceed estimates. Lines 901 and most of Line 903 remained out of service, with no restart timeline stated. The company reported that securities class-action claims were dismissed with prejudice on April 2, 2018, and plaintiffs had indicated an intent to appeal.
- Total environmental liabilities, including Line 901, were estimated at $153 million at March 31, 2018. Management cautioned that actual remediation and legal costs may exceed reserves.
- A March 2018 FERC policy change does not affect the company’s current cost-of-service rates, which are grandfathered or negotiated. It could, depending on future implementation, constrain escalations on certain regulated pipeline tariffs beginning with the July 2021 index review.
- Commodity, interest-rate and Canadian-dollar exposures are managed with derivatives. Derivative mark-to-market volatility materially affected period comparisons; the filing reports a $53 million net derivative loss recognized in Q1 2018, versus an $89 million net gain in Q1 2017.
- Topic 606 adoption had no material impact on Q1 revenue or opening retained earnings. Adoption of ASU 2017-05 increased investments and partners’ capital by $113 million. The company expected the lease-accounting standard effective in 2019 to add right-of-use assets and lease liabilities, but had not quantified the amounts.
Most important facts for investors to verify
- Whether the planned asset sales close and deliver the expected proceeds, and whether expansion spending remains near the $1.4 billion plan.
- How operating cash flow, working capital and available credit evolve as the company funds capital projects, debt service and distributions.
- Whether Transportation and Supply and Logistics improvements persist, and how much reported earnings continue to be affected by derivative valuation and commodity-market volatility.
- Developments in Line 901 investigations, litigation, insurance recoveries and potential costs beyond the recorded liability and reserve.
- The implications of the FERC index policy for future tariff escalations, and the eventual balance-sheet impact of lease-accounting adoption.