Business context and reporting period
Plains All American Pipeline, L.P. (NYSE: PAA) filed its Form 10-K for the fiscal year ended December 31, 2019. The partnership owns and operates crude oil, natural gas liquids (NGL) and natural gas infrastructure in the United States and Canada. Its segments are Transportation, Facilities, and Supply and Logistics. The filing reports full-year results; fourth-quarter figures are shown only in selected quarterly data.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $33.669 billion | $34.055 billion | Down 1% |
| Operating income | $1.988 billion | $2.277 billion | Down 13% |
| Net income | $2.180 billion | $2.216 billion | Down 2% |
| Net income attributable to PAA | $2.171 billion | $2.216 billion | Down 2% |
| Basic / diluted net income per common unit | $2.70 / $2.65 | $2.77 / $2.71 | Lower |
| Net cash from operating activities | $2.504 billion | $2.608 billion | Down 4% |
| Net cash used in investing activities | $1.765 billion | $813 million | Higher use of cash |
| Adjusted EBITDA (non-GAAP) | $3.237 billion | $2.684 billion | Up 21% |
| Implied DCF (non-GAAP) | $2.376 billion | $1.948 billion | Up 22% |
Operating margin was approximately 5.9% in 2019, compared with 6.7% in 2018; net margin was approximately 6.5% versus 6.5%. These are calculated from reported revenue and income.
- Segment Adjusted EBITDA: Transportation $1.722 billion, up 14%; Facilities $705 million, down 1%; Supply and Logistics $803 million, up 74%. Supply and Logistics benefited from favorable crude differentials and NGL margins.
- Debt and liquidity: Total debt was $9.691 billion, including $9.187 billion of long-term debt and $504 million of short-term debt. Available liquidity was approximately $2.470 billion, including cash and facility availability; working capital was negative $405 million. PAA reported compliance with debt covenants.
- Capital and distributions: 2019 expansion capital was $1.340 billion and maintenance capital was $287 million. Common-unit distributions paid during the year totaled $1.004 billion, or $1.38 per unit. The fourth-quarter distribution was $0.36 per unit, paid in February 2020.
Material changes versus the prior comparable period
- Transportation Adjusted EBITDA increased with higher Permian volumes and completed expansions; total Transportation tariff volumes rose 18% to 6.805 million barrels per day.
- Supply and Logistics Adjusted EBITDA rose substantially, principally on stronger crude oil differentials in the Permian and Canada and improved NGL margins. Management cautioned that elevated-margin opportunities were not expected to persist.
- Facilities Adjusted EBITDA was nearly flat. Higher natural gas storage rates and activity were offset by weaker NGL-related results and other factors.
- Net income was slightly lower despite higher Adjusted EBITDA. Results included higher depreciation and amortization, less favorable derivative mark-to-market effects, and a change from a 2018 asset-sale gain to a 2019 net loss on asset sales and impairments.
- Operating cash flow edged down. Investing cash use increased, including $524 million of contributions to unconsolidated entities; divestiture proceeds fell to $205 million from $1.334 billion in 2018.
- Common distributions paid increased to $1.38 per unit from $1.20 in 2018. In April 2019, PAA said it had completed its leverage reduction plan and set a 3.0x–3.5x long-term debt-to-Adjusted EBITDA target and a sustainable minimum distribution coverage target of 130%.
Outlook, management commentary, risks and unusual items
- Capital plan: Management projected approximately $1.4 billion of expansion capital for 2020, primarily in fee-based Transportation and Facilities projects. It expected limited contribution to 2020 results, with growth anticipated from 2021 onward. Project timing, permits, costs and shipper commitments remain uncertainties.
- Market and competition: New pipeline capacity was expected to leave the Permian amply supplied with takeaway capacity, increasing competition and potentially pressuring throughput and margins. Management did not expect recent favorable Supply and Logistics margin opportunities to continue for the foreseeable future.
- Post-year-end transactions: PAA acquired Felix Midstream for approximately $305 million in February 2020. It also agreed to sell certain Los Angeles Basin terminals for $195 million, subject to adjustments and closing conditions, and anticipated an approximately $160 million loss. In February 2020 it sold a 10% Saddlehorn interest for approximately $78 million.
- Unusual accounting item: PAA recorded a $269 million non-cash gain when it contributed its Capline pipeline interest to a joint venture and remeasured the resulting equity investment. The gain relied on Level 3 discounted-cash-flow assumptions, including tariffs, volumes, capital spending and terminal value. A $200 million BridgeTex-related gain was recorded in 2018.
- Line 901 incident: The 2015 California pipeline release remained a significant contingency. PAA estimated aggregate costs of approximately $390 million, reported an $83 million remaining gross liability at year-end, and had recognized a $62 million receivable for probable insurance recovery. Further costs, claims, natural-resource damages, fines or penalties could exceed estimates; Lines 901 and most of Line 903 remained out of service.
- Other risks: Material exposures include environmental and pipeline-safety obligations, climate and other regulation, severe weather, cybersecurity, insurance availability, counterparty credit, commodity-market structure, and potential capacity overbuild. The filing also disclosed Canadian tax reassessments of approximately $78 million, of which about $48 million had been remitted and recorded as an asset while PAA contested the assessments.
- Auditor and controls: PwC issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Reconcile reported GAAP earnings with Adjusted EBITDA and Implied DCF, including the sizable derivative, inventory and other comparability adjustments.
- Track leverage, facility availability, working-capital needs and cash distributions against management’s leverage and 130% coverage targets.
- Assess the $1.4 billion 2020 capital plan, project commitments and schedule, and the effect of new Permian takeaway capacity on utilization and tariffs.
- Monitor changes to Line 901 environmental liabilities, insurance recoveries, legal proceedings and any restart, retirement or impairment decisions for idled assets.
- Review the Capline fair-value assumptions and subsequent transaction updates, including the Los Angeles terminal sale, expected loss and Felix acquisition.