Plains All American Pipeline, L.P. — Q3 2022 Form 10-Q
Period: Three and nine months ended September 30, 2022; unaudited. PAA operates crude oil and NGL pipelines, gathering, storage, terminalling and related businesses in the U.S. and Canada.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $14.336bn | $10.776bn | $44.390bn | $29.089bn |
| Operating income/(loss) | $626m | $(38)m | $1.330bn | $252m |
| Net income/(loss) | $442m | $(55)m | $918m | $152m |
| Net income/(loss) attributable to PAA | $384m | $(59)m | $774m | $143m |
| Basic and diluted earnings/(loss) per common unit | $0.48 | $(0.15) | $0.89 | $(0.01) |
| Adjusted EBITDA (non-GAAP) | $721m | $519m | $2.115bn | $1.643bn |
| Adjusted EBITDA attributable to PAA (non-GAAP) | $623m | $514m | $1.851bn | $1.631bn |
All dollar amounts are U.S. dollars. Revenue growth largely reflects higher crude oil and NGL prices and volumes; product sales and purchase costs both rose substantially. PAA reported no consolidated gross margin percentage in the supplied filing text.
- Segment performance: Q3 Segment Adjusted EBITDA was $536m for Crude Oil (up 17%) and $86m for NGL (up 59%). For the first nine months, Crude Oil was $1.482bn (roughly flat) and NGL was $367m (up 155%). NGL benefited principally from higher realized fractionation spreads and increased straddle-plant supply. Crude Oil benefited from higher pipeline volumes, favorable Canadian differentials and higher loss-allowance revenue.
- Cash flow: Nine-month operating cash flow was $2.074bn, compared with $1.361bn. Free cash flow after distributions, a non-GAAP measure, was $1.046bn versus $1.304bn. Nine-month investing cash outflow was $291m and financing cash outflow was $1.608bn.
- Liquidity and debt: At September 30, cash was $623m and reported total debt was $8.445bn, down from $9.220bn at December 31, 2021. Available liquidity was approximately $3.265bn, including $2.642bn of facility capacity. PAA was in compliance with debt covenants. In March, it redeemed $750m of senior notes; in August, it extended credit-facility maturities to August 2025 and August 2027.
- Distributions and capital: The quarterly common-unit distribution was $0.2175 per unit. PAA announced an intention to recommend an annualized $0.20-per-unit increase for the fourth-quarter 2022 distribution, subject to board approval. Nine-month repurchases totaled $74m. PAA projected 2022 investment capital of about $330m gross ($275m net to its interest) and maintenance capital of $220m gross ($210m net).
Material changes and unusual items
- Nine-month earnings improved substantially versus 2021, when results included $592m of net asset-sale losses and impairments, including large natural-gas-storage impairments. 2022 included a $46m net gain on asset sales and impairments.
- The Permian JV, formed in October 2021, increased reported Permian tariff volumes; PAA’s results reflect the 35% noncontrolling interest. Crude Oil pipeline tariff volumes rose 26% for the nine-month period, including 32% growth in the Permian region.
- Other expense included a $196m nine-month mark-to-market loss on the Series A preferred distribution-rate reset option, versus a $13m gain in 2021. This non-cash fair-value item materially affected GAAP earnings. Foreign-currency revaluation also contributed to other expense.
- On October 13, 2022, PAA sold Line 901 and a portion of Line 903. The buyer assumed applicable future Consent Decree responsibilities. PAA also paid a $230m Line 901 class-action settlement on October 27; the settlement had been approved before quarter-end.
- After quarter-end, on November 2, PAA acquired an additional 5% interest in Cactus II for approximately $88m, bringing ownership to 70% and giving PAA control. The filing expects consolidation at fair value and a gain from remeasuring its previously held interest.
Outlook, risks and contingencies
- During Q3, PAA temporarily shut down California’s Line 2000 after an inspection and began additional testing. Depending on results, the pipeline could have a shorter useful life or an impairment; the associated asset group’s carrying value was approximately $540m, excluding linefill. The filing does not provide a clear estimate of any resulting impairment.
- For the Line 901 incident, PAA estimated total costs incurred or expected at approximately $730m and a remaining gross liability of about $330m at September 30. It recognized a $240m receivable for insurance recovery it believes probable, net of amounts collected; it had collected approximately $265m of the $505m it believed recoverable. PAA said it expects to reach the applicable $500m insurance-program limit. Remaining claims and estimates are subject to uncertainty, and actual costs could exceed accruals.
- Other risks include commodity-price and market volatility, lower production or demand, competition and capacity overbuild, counterparty credit or performance failures, environmental liabilities, severe weather, operational or cyber incidents, insurance limitations, and access to capital. PAA uses derivatives for risk management; their fair values and earnings effects can fluctuate materially.
- Management stated it believes available cash, operating cash flow and borrowing capacity are sufficient for commitments and anticipated capital needs, while noting that a sustained cash-flow decline could impair borrowing capacity or increase borrowing costs. No specific earnings or cash-flow guidance for 2023 is provided in the filing text.
Most important facts for investors to verify
- Whether the proposed common-distribution increase was approved and declared, and the resulting distribution coverage and retained cash.
- Results of Line 2000 inspections and whether they lead to a useful-life reduction, impairment or extended outage.
- Line 901 insurance collections, remaining claims and whether final costs exceed the $730m estimate or available insurance.
- Whether higher Crude Oil and NGL segment earnings and cash generation persist if commodity prices, differentials, volumes or frac spreads change.
- Post-quarter Cactus II consolidation accounting, including the remeasurement gain and effects on debt, earnings and noncontrolling interests.
- Debt maturities, facility availability and covenant compliance, as well as the distinction between GAAP results and management’s non-GAAP EBITDA and cash-flow measures.