PLAINS ALL AMERICAN PIPELINE LP quarterly report, Q2 FY2019

Business context and reporting period

Plains All American Pipeline, L.P. (PAA) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. It owns and operates midstream energy infrastructure and logistics services for crude oil, NGL and natural gas in the United States and Canada, through Transportation, Facilities, and Supply and Logistics segments. Unless otherwise noted, amounts are in millions of dollars.

Financial performance and position

• Six-month operating cash flow was $1,464 versus $1,015; investing cash outflow was $978 versus $506. Cash and restricted cash totaled $461 at June 30, 2019.
• At June 30, cash was $419, total debt was $9,646 (versus $9,209 at year-end 2018), and partners’ capital was $13,073. Working capital was negative $12. Management reported approximately $2,948 of available liquidity, subject to covenant compliance; PAA was in compliance at quarter-end.
• Common-unit cash distributions were $480 for the first six months. Implied DCF available to common unitholders was $1,183, leaving reported excess DCF of $703 after common distributions.
• Reported operating margins are not separately stated. The filing reports operating income and segment measures instead.

Material changes versus the prior comparable period

• Revenue increased modestly, while net income attributable to PAA rose substantially. Management attributed the improvement to stronger Supply and Logistics results, higher Transportation volumes and a $267 non-cash gain from the Capline transaction, along with lower income tax expense.
• Supply and Logistics Segment Adjusted EBITDA was $200 in Q2 versus a loss of $26 a year earlier; Transportation was $410 versus $360, while Facilities was broadly unchanged at $172 versus $171. Six-month segment results also improved, particularly in Supply and Logistics and Transportation.
• Performance comparisons were affected by markedly different derivative and inventory-related gains and losses between periods, and by the $81 gain on asset sales and impairments recorded in the first half of 2018. The 2019 first-half result included the Capline gain and an approximately $60 deferred tax benefit from Alberta tax-rate legislation.
• Operating cash flow increased year over year, but cash flow can be affected by inventory levels, derivative margin requirements and timing of customer receipts. Six-month 2018 cash flow included approximately $300 of cash received for transactions whose revenue recognition was deferred.
• PAA adopted lease accounting Topic 842 in January 2019, recording approximately $560 of right-of-use assets and $570 of lease liabilities at adoption; the adoption had no material effect on earnings or cash flows.

Outlook, management commentary, risks and unusual items

• PAA expected approximately $1.5 billion of 2019 expansion capital, primarily for Permian Basin projects; it had invested $695 through June. Management expected to fund the program with retained cash flow, asset-sale proceeds or debt. No quantified earnings guidance is provided in the filing.
• In April 2019, PAA reported completing its leverage reduction plan and set a long-term debt-to-Adjusted EBITDA target of 3.0x–3.5x and a sustainable minimum annual distribution coverage target of 130%. It said future common distribution increases would be considered annually and would depend on maintaining targeted leverage and coverage.
• The declared Q2 common distribution was $0.36 per unit, or $1.44 annualized; payment was scheduled for August 14, 2019. Series A preferred distributions were $0.525 per unit quarterly.
• Growth initiatives include W2W and Red Oak pipeline projects, both targeted to begin service in 2021. Red Oak timing depends on permits and regulatory approvals. After quarter-end, W2W’s additional partners reduced PAA’s interest from 20% to 16%; Capline owners sanctioned a system reversal, and Diamond Pipeline owners sanctioned an expansion and connection to Capline. These plans depend on shipper interest and execution.
• Line 901/903 remain largely out of service following the 2015 Line 901 release; no restart timeline was established. PAA estimated total Line 901 incident costs at approximately $380, with $88 of remaining gross liability at June 30. It had recorded a $67 receivable for probable insurance recovery related to the incident. Investigations, claims and litigation remain, and actual costs could exceed estimates. PAA had paid approximately $3.35 in fines and penalties under its 2019 sentence; other proceedings and possible penalties remain.
• Total environmental liabilities, including Line 901, were estimated at $143, with $74 of related insurance and third-party recovery receivables recorded. Management cautioned that releases, remediation uncertainty and legal claims could result in costs above reserves.
• Debt includes $500 of senior notes due December 2019 and $500 due January 2020, classified as long-term based on management’s ability and intent to refinance. Refinancing access, covenant compliance, commodity-market volatility, project execution, customer volumes, counterparty credit and Canadian currency exposure are among the disclosed risks.

Important facts for investors to verify

1. How much of the earnings and cash-flow improvement is supported by recurring operations versus the Capline gain, tax benefit, derivative valuation changes and other selected adjustments.
2. Progress toward the 3.0x–3.5x leverage and 130% distribution-coverage targets, including the calculation basis for company-defined non-GAAP measures.
3. Funding and returns for the planned $1.5 billion expansion program, and whether W2W, Red Oak and Capline proceed on the stated schedules and assumptions.
4. Refinancing of the December 2019 and January 2020 notes, ongoing liquidity availability and continued compliance with financing covenants.
5. Changes in Line 901/903 reserves, insurance recoveries, litigation and regulatory outcomes, and any effect on operations or cash flows.
6. Whether higher pipeline volumes and favorable differentials persist, and how commodity, derivative-margin, weather and counterparty conditions affect cash generation.