Plains All American Pipeline, L.P. — Q3 2016 Form 10-Q
Business and period: Unaudited results for the three and nine months ended September 30, 2016. PAA owns and operates crude oil, NGL, natural gas and refined-products pipelines, storage and other midstream assets across the U.S. and Canada, through Transportation, Facilities, and Supply and Logistics segments.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $5.170bn | $5.551bn | $14.231bn | $18.156bn |
| Operating income | $349m | $335m | $777m | $918m |
| Net income attributable to PAA | $297m | $249m | $599m | $657m |
| Basic net income per common unit | $0.40 | $0.25 | $0.27 | $0.54 |
| Adjusted EBITDA | $450m | $497m | $1.531bn | $1.605bn |
| Implied distributable cash flow | $293m | $340m | $1.046bn | $1.092bn |
Operating margin, calculated as operating income divided by revenue, was approximately 6.7% for Q3 2016 versus 6.0% a year earlier, and 5.5% for the nine-month period versus 5.1%. The filing reports total debt of $11.018bn at September 30, down from $11.374bn at December 31, 2015. Cash was $31m; working capital was negative $304m. Reported available liquidity was approximately $2.502bn, subject to covenant compliance.
Operating cash flow for the first nine months was $642m, versus $1.222bn in 2015. Investing cash outflow was $854m, compared with $2.069bn; financing cash inflow was $212m, compared with $469m. Implied DCF was below distributions by $35m in Q3 and $148m for the nine months. PAA had approximately $1.5bn of variable-rate debt; its senior notes were fixed-rate.
Material changes and drivers
- Nine-month revenue fell 22%, largely reflecting lower crude oil and NGL prices. Supply and Logistics segment profit fell to $13m from $258m; Q3 shifted from $87m profit to a $6m loss. Management cited compressed differentials, competition, excess infrastructure capacity, lower volumes in some areas and weaker margins.
- Transportation segment profit rose 12% to $760m for nine months, helped by the absence of 2015 Line 901 incident costs and increased Permian activity. Facilities segment profit increased 13% to $488m, supported by expansions and acquisitions.
- Q3 net income attributable to PAA increased 19%, while nine-month net income declined 9%. Results included a $17m Q3 and $42m nine-month gain from marking the Series A preferred distribution-rate reset option to market. Nine-month depreciation and amortization included net gains of $99m from asset sales and joint venture formations, alongside $80m of rail and terminal impairments and an $18m asset write-off.
- PAA raised approximately $1.6bn net from a January Series A preferred-unit placement and issued common units for $289m net proceeds during the first nine months. Preferred distributions were paid in additional units during the initial distribution period.
Outlook, capital allocation and risks
- PAA declared a Q3 common distribution of $0.55 per unit, payable November 14, 2016, a 21% reduction from the prior $0.70 quarterly rate. Management said the lower distribution was intended to improve coverage and the credit profile.
- Management forecast 2016 expansion capital of $1.375bn–$1.475bn and maintenance capital of $175m–$185m. Expansion investment was $1.065bn through September. Management cautioned that project returns, production levels and market recovery are uncertain.
- The proposed simplification, expected to close November 15, 2016 subject to approvals and customary conditions, would exchange approximately 245.5m PAA common units and assumption of AAP debt (estimated at $641m at closing) for AAP’s IDRs; PAA’s 2% economic general partner interest would become non-economic. PAA expected to repay the assumed debt shortly after closing using credit facilities.
- Line 901 remains shut down, as does Line 903; no restart timetable was established. PAA estimated total Line 901 costs at approximately $280m, with $87m of remaining gross liability and a $68m receivable for probable insurance recovery. Government investigations, civil claims and lawsuits remain pending; PAA said additional costs, penalties or claims could exceed its estimates. The company also disclosed other environmental and regulatory matters.
- Key risks include prolonged weak production and margins, infrastructure overcapacity and competition, market volatility, financing access and covenant compliance, Canadian currency movements, project execution and environmental exposure. Management reported compliance with credit covenants at September 30.
Investor verification priorities
- Confirm the distribution reduction’s effect on coverage, liquidity and future distributions.
- Verify completion and final terms of the simplification, including the debt assumed and repayment funding.
- Track Line 901 and other legal and environmental matters, insurance recoveries, and any changes to estimated liabilities.
- Assess whether Supply and Logistics margins and distributable cash flow recover, and compare realized results with capital-spending plans.
- Monitor debt maturities, borrowing capacity, working-capital needs and compliance with credit covenants.