PLAINS GP HOLDINGS, L.P. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 27, 2020. This is an annual report, not a standalone fourth-quarter report. PAGP has no direct operating assets: its cash generation depends on distributions from AAP, which in turn receives distributions from Plains All American Pipeline, L.P. (PAA). The consolidated financial statements include PAA’s operating business.
Business context and financial results
PAA operates crude oil, natural gas liquids (NGL) and natural gas transportation, storage, terminalling, processing and marketing businesses in the United States and Canada.
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $33.669 billion | $34.055 billion | Down 1% |
| Operating income | $1.980 billion | $2.272 billion | Down 13% |
| Operating margin | 5.9% | 6.7% | Down 0.8 percentage points |
| Consolidated net income | $2.062 billion | $2.107 billion | Down 2% |
| Net income attributable to PAGP | $331 million | $334 million | Down 1% |
| Basic earnings per PAGP Class A share | $1.97 | $2.12 | Down 7% |
| Adjusted EBITDA (non-GAAP) | $3.232 billion | $2.680 billion | Up 21% |
| Cash from operating activities | $2.500 billion | $2.604 billion | Down 4% |
| Expansion capital expenditures | $1.340 billion | $1.888 billion | Down 29% |
| Maintenance capital expenditures | $287 million | $252 million | Up 14% |
Adjusted EBITDA is a company-defined non-GAAP measure; it excludes selected items and should be considered alongside GAAP results. Revenue is heavily weighted toward Supply and Logistics commodity sales, so revenue is not, by itself, a measure of underlying fee-based performance.
Liquidity, debt and distributions
- At year-end, consolidated debt was $9.691 billion, including $9.187 billion of long-term debt and $504 million of short-term debt. PAA issued $1.0 billion of 3.55% senior notes due 2029 and repaid $1.0 billion of notes due in 2019 and 2020.
- Reported available liquidity was approximately $2.472 billion, including $47 million cash and borrowing availability under PAA facilities, net of commercial paper outstanding. PAA reported compliance with its debt covenants. Consolidated working capital was negative $405 million.
- PAGP paid $1.38 per Class A share in 2019, versus $1.20 in 2018. The quarterly distribution was raised to $0.36; the fourth-quarter 2019 distribution was paid February 14, 2020. PAA’s common-unit distribution was also $0.36 for the quarter.
- PAGP’s distribution capacity depends on PAA’s ability to generate and distribute cash to AAP and on reserves, taxes and debt restrictions. Distributions are not guaranteed or cumulative.
Material changes and unusual items
- Transportation Segment Adjusted EBITDA rose 14% to $1.722 billion, supported primarily by Permian Basin volume growth and completed expansions. Transportation tariff volumes increased 18%.
- Supply and Logistics Segment Adjusted EBITDA increased 74% to $803 million, largely from favorable crude oil differentials, particularly in the Permian and Canada, and improved NGL margins. Management cautioned that these unusually favorable margin opportunities were not expected to persist for the foreseeable future.
- Facilities Segment Adjusted EBITDA declined 1% to $705 million. Natural gas storage activity and crude oil storage improved, while lower NGL-related contributions and currency effects weighed on results.
- Net income included a $269 million non-cash gain from the contribution of the Capline pipeline interest to a joint venture; 2018 included a $200 million gain on the sale of part of BridgeTex. The 2019 result also reflected a $28 million net loss on asset sales and impairments, versus a $114 million net gain in 2018, and higher depreciation and amortization.
- Operating cash flow was affected by inventory and working-capital movements. Receivables and payables increased substantially year over year; reported operating cash flow was $104 million lower than in 2018.
Outlook, risks and contingencies
- PAA targeted a long-term debt-to-Adjusted EBITDA range of 3.0x–3.5x and minimum annual distribution coverage of 130%. Future distribution increases were described as contingent on leverage and coverage targets and annual review; this filing does not provide a specific 2020 earnings or distribution-growth forecast.
- PAA projected approximately $1.4 billion of 2020 expansion capital, largely for contracted pipeline and Permian projects. Management expected limited contribution to 2020 results, with growth expected in 2021 and beyond. Project schedules remain subject to permits, approvals, construction costs and other execution risks.
- After year-end, PAA acquired Felix Midstream for approximately $305 million. It also agreed to sell Los Angeles Basin crude oil terminals for $195 million, subject to adjustments and closing conditions; management anticipated an approximately $160 million loss. In February 2020, it sold a 10% Saddlehorn interest for approximately $78 million.
- Permian pipeline additions may create excess takeaway capacity and pressure volumes and margins. Other significant risks include production and demand declines, commodity-market structure and volatility, counterparty and credit risk, regulatory changes, environmental liabilities, severe weather, cyber events, project delays and restricted access to capital. The filing specifically cited the coronavirus outbreak in China as a potential threat to petroleum demand.
- The 2015 Line 901 California crude oil release remains a material contingency. PAA estimated aggregate costs of approximately $390 million, with an $83 million remaining gross liability at year-end and an estimated $62 million insurance receivable. The company cautioned that total costs could be materially higher; Line 901 and most of Line 903 remained out of service.
- Canadian tax authorities had issued reassessments totaling approximately $78 million, including penalties and interest, relating primarily to transfer pricing for 2008–2014. PAA had remitted approximately $48 million while contesting the assessments.
- Management and the auditor reported effective internal control over financial reporting. The auditor identified goodwill impairment assessments and the Capline investment fair value as critical audit matters involving significant estimates and unobservable inputs.
Important facts for investors to verify
- Whether fee-based transportation and facilities cash flows can offset weaker Supply and Logistics margins as favorable differentials normalize.
- PAA’s leverage, liquidity, covenant headroom and distribution coverage relative to its stated targets, including the treatment of preferred distributions and working-capital borrowings.
- Progress, final costs and returns on the $1.4 billion 2020 capital plan, including permitting and in-service dates for major joint-venture pipelines.
- Updated Line 901 liability estimates, insurance recoveries, remaining claims and any effect on operations or cash distributions.
- Resolution and cash implications of the Canadian tax reassessments, and the basis and sensitivity of the $269 million Capline gain and goodwill valuations.
- Whether the Los Angeles terminal sale closes on expected terms and whether the anticipated loss is realized.