Plains All American Pipeline, L.P. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. PAA owns and operates midstream transportation, storage, terminal and gathering assets, with Transportation, Facilities, and Supply and Logistics segments.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $5,873 | $5,170 | $18,618 | $14,231 |
| Operating income | $44 | $349 | $892 | $777 |
| Net income attributable to PAA | $33 | $297 | $665 | $599 |
| Basic net income/(loss) per common unit | $(0.01) | $0.40 | $0.77 | $0.27 |
| Net cash provided by operating activities | Not separately stated | Not separately stated | $1,918 | $648 |
- Q3 revenue growth largely reflected higher Supply and Logistics sales values, which moved with commodity prices; purchases and related costs also increased. The quarter’s operating income fell sharply as depreciation and amortization rose to $151 million from $33 million, reflecting acquired and completed assets and losses on asset sales and joint-venture formations.
- Q3 results included a $216 million adjustment for derivative activity net of inventory valuation adjustments in the reconciliation to segment adjusted EBITDA. Supply and Logistics reported segment adjusted EBITDA of negative $56 million, versus negative $17 million a year earlier. Transportation and Facilities adjusted EBITDA rose to $363 million and $182 million, respectively.
- For the first nine months, PAA reported adjusted EBITDA of $1.452 billion versus $1.569 billion and implied distributable cash flow of $892 million versus $1.046 billion. Distributions paid were $1.016 billion, exceeding implied DCF by $124 million. Q3 implied DCF was $299 million versus $293 million; distributions paid were $218 million.
- Total debt was $11.407 billion at September 30, down from $11.839 billion at December 31, 2016. Cash was $33 million; working capital deficit was $1 million. Reported available liquidity, including cash, was approximately $2.487 billion. PAA said it was in compliance with credit agreement covenants.
- Total assets were $25.483 billion, compared with $24.210 billion at year-end 2016. Cash from operations was boosted by reductions in crude inventory and hedge margin balances that had been debt-funded; those working-capital effects mean the increase over 2016 should not be read as a comparable improvement in recurring earnings.
Material changes and capital allocation
- PAA acquired the Alpha Crude Connector gathering system in the Northern Delaware Basin for approximately $1.217 billion and a propane marine terminal for approximately $41 million. It also acquired a 50% interest in the Advantage Pipeline joint venture.
- Nine-month investment included $1.325 billion of acquisition capital, $893 million of expansion capital and $194 million of maintenance capital. Full-year 2017 expansion capital was projected at approximately $1.05 billion; the preliminary 2018 expansion-capital forecast was $700 million.
- PAA issued approximately 54.1 million common units in the first four months of 2017 for net proceeds of $1.664 billion. It received $407 million from non-core asset sales during the first nine months and had approximately $630 million of assets classified as held for sale at September 30.
- On October 10, 2017, after quarter-end, PAA issued 800,000 Series B preferred units for net proceeds of $788 million, intended for debt repayment and general partnership purposes. The preferred units carry an initial 6.125% annual distribution rate through November 2022, after which the rate floats with three-month LIBOR plus a spread.
Outlook, risks and contingencies
- PAA announced a reset of its annualized common-unit distribution to $1.20, effective with the third-quarter 2017 distribution payable in November, down from $2.20 annualized. Management said the reduction was intended to align distributions with fee-based Transportation and Facilities cash generation and retain cash to reduce debt.
- The stated plan targeted approximately $700 million of non-core and strategic asset sales, about $300 million of reduction in hedged crude and NGL inventory borrowings, and a reduction of total debt to approximately $9.7 billion by March 31, 2019. PAA also intended to redeem $950 million of senior notes before year-end 2017. Management cautioned that these objectives were subject to execution risks and could not be assured.
- Management expected production to rise in Q4 2017 and during 2018, supporting Transportation utilization, but noted the lag between drilling and production. It described ongoing intense competition, excess infrastructure capacity and compressed crude oil and NGL margins as major pressures, especially for Supply and Logistics; segment earnings were difficult to forecast.
- The 2015 Line 901 California oil release remains a significant contingency. PAA estimated total incident costs at approximately $300 million and reported a remaining gross liability of $64 million at September 30. It had collected $166 million of approximately $205 million in costs believed recoverable from insurers and recorded a further $39 million receivable. Additional claims, regulatory actions, fines, penalties and legal costs could cause total costs to exceed estimates. Lines 901 and most of 903 remained out of service, with no restart timeline; approximately $124 million of related idled assets was carried on the balance sheet.
- Total environmental liabilities, including Line 901, were estimated at $134 million. Other operating risks include commodity and interest-rate exposure, counterparty credit, weather, asset utilization, financing access, and potential impairment or retirement costs for idled or underutilized assets. Management identified possible impairment exposure for its $196 million Capline interest as outlook and use of the system remain uncertain.
- In the fourth quarter, PAA completed certain non-core pipeline sales for approximately $385 million and entered into a new agreement to sell California terminal assets after terminating an earlier proposed sale. These and other subsequent-period transactions were not reflected as completed sales at September 30.
Important facts for investors to verify
- Whether operating cash flow remains strong after the favorable inventory and margin-balance movements, and whether the planned debt reduction and note redemptions were completed.
- Progress and realized proceeds from targeted asset sales, including the California terminal transaction, and the status of assets held for sale.
- Whether the lower common-unit distribution is supported by recurring distributable cash flow, given nine-month DCF below distributions paid.
- Supply and Logistics margin trends, derivative-related volatility, and the pace at which Permian production growth converts into pipeline volumes and fee-based earnings.
- Developments in Line 901 investigations, litigation, insurance recoveries and remediation costs, as well as any restart, impairment or retirement decisions for Lines 901/903 and Capline.