Plains GP Holdings, L.P. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. All amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. PAGP consolidates PAA and related entities, so consolidated results include substantial noncontrolling interests. PAGP held an approximate 22.4% limited partner interest in AAP at quarter-end.
Financial performance
| Metric | Q2 2014 | Q2 2013 | H1 2014 | H1 2013 |
|---|---|---|---|---|
| Revenue | $11,195 | $10,295 | $22,878 | $20,915 |
| Operating income | $364 | $383 | $854 | $1,036 |
| Net income | $275 | $299 | $647 | $834 |
| Net income attributable to PAGP | $15 | $1 | $29 | $2 |
| Net income per Class A share | $0.11 | Not presented | $0.21 | Not presented |
| Operating cash flow | Not separately reported | Not separately reported | $954 | $1,334 |
- Q2 revenue rose about 9%, while net income fell 8%; H1 revenue rose about 9%, while net income fell 22%. Higher revenue largely reflects the high-volume Supply and Logistics business and should not be read as equivalent margin growth.
- H1 operating cash flow declined $380 million year over year. Investing cash outflow was $1,101 million, including $918 million of property, equipment and other additions; financing cash flow was positive $132 million. Cash ended the period at $28 million.
- Segment profit: Transportation was $221 million in Q2 and $427 million in H1; Facilities was $134 million and $288 million; Supply and Logistics was $133 million and $382 million, respectively. H1 segment profit fell 11% to $1,097 million.
- Transportation strength reflected higher North American production, throughput and growth projects. Supply and Logistics profit decreased 24% in Q2 and 37% in H1, mainly because weaker first-quarter crude market opportunities reduced above-baseline margins. Facilities profit declined 10% in Q2 and 4% in H1.
- Debt totaled $8,703 million at June 30, versus $8,343 million at year-end 2013. This included $763 million short-term debt and $7,940 million long-term debt. PAA issued $700 million of 4.70% senior notes due 2044 in April.
- Working capital was negative $254 million. Reported liquidity was approximately $2,279 million, including available facility capacity and $28 million cash; PAA and AAP reported compliance with credit covenants.
- H1 capital spending was $1,109 million, including $1,012 million for internal growth projects and $95 million maintenance capital. No standalone gross or operating margin percentage is clearly provided.
Material changes and outlook
- Management attributed lower H1 earnings chiefly to less favorable crude oil market conditions and fewer opportunities for above-baseline Supply and Logistics margins. Transportation gains partly offset the declines.
- Severe first-quarter cold weather increased natural gas storage deliverability costs and contributed to a $37 million natural gas inventory writedown during H1.
- Management projected 2014 expansion capital expenditures of $1.85 billion to $2.05 billion, subject to timing, scope, permitting, materials, labor and weather. It expects funding from operating cash flow, borrowings and access to equity and debt markets. No full-year earnings guidance is provided in the filing text.
- PAGP declared a quarterly distribution of $0.18340 per Class A share, payable August 14, 2014. PAA’s distribution for the quarter was $0.6450 per limited partner unit.
- Management expects Supply and Logistics earnings to be affected by volumes, demand, market volatility and changing infrastructure. It cautioned that new infrastructure may normalize crude logistics margins.
Risks, contingencies and unusual items
- Environmental liabilities were reserved at approximately $92 million, undiscounted, at June 30. Management warned actual remediation costs could exceed reserves. Pipeline releases and associated remediation remain operational risks; July 2014 settlements for the Rainbow and Rangeland incidents were $450,000 CAD and $850,000 CAD, respectively.
- A Rancho LPG subsidiary agreed to a $260,000 EPA civil penalty in May 2014; the facility was reported compliant with the cited rules at that time. A separate Bay Springs release could result in a civil penalty. The Kemp River investigation was ongoing, with estimated cleanup costs of approximately $15 million.
- Management cited exposure to commodity, interest-rate and Canadian-dollar movements; counterparty credit, capital-market access, project execution, weather, throughput, and environmental and regulatory risks. Derivatives are used principally for risk management, but fair values and margin requirements can fluctuate.
- Management stated ordinary-course litigation was not expected to have a material adverse effect. PAGP’s disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.
Important facts for investors to verify
- How much of consolidated earnings and cash flow accrues to PAGP after noncontrolling interests, and the resulting sustainability of PAGP distributions.
- Whether the projected $1.85–$2.05 billion expansion program is completed on schedule and within budget, and how it is financed.
- Whether crude logistics margins continue to normalize, and whether Transportation growth offsets Supply and Logistics weakness.
- Liquidity and refinancing capacity in light of the working capital deficit, commercial paper borrowings and total debt.
- Potential changes to environmental reserves and liabilities, pipeline remediation outcomes, and commodity-hedge and margin exposure.