Business context and reporting period
Plains All American Pipeline, L.P. is a midstream energy partnership operating pipeline transportation, storage, terminalling, processing and supply/logistics businesses in the United States and Canada. This unaudited Form 10-Q covers the three months ended March 31, 2016; comparisons are with the first quarter of 2015 unless noted. Dollar amounts are in millions except per-unit data.
Financial performance and condition
- Revenue and earnings: Revenue was $4,111, down 31% from $5,942. Operating income was $282 versus $372; net income attributable to PAA was $202 versus $283, a 29% decline. Basic and diluted net income per common unit were both $0.07, compared with $0.36 and $0.35, respectively. The filing does not provide a clear consolidated operating-margin measure.
- Segment results: Total segment profit fell 14% to $443. Supply and Logistics profit dropped to $37 from $130, reflecting weaker lease-gathering margins amid competition and excess infrastructure, softer NGL margins, and foreign-exchange effects. Transportation profit rose to $247 from $241, and Facilities profit rose to $159 from $142. Adjusted EBITDA was essentially unchanged at $621 versus $622; implied distributable cash flow was $439 versus $445.
- Cash flow and investment: Operating cash flow was $635 versus $732. Net cash used in investing activities was $287, including $372 of property, equipment and other additions, $85 for acquisitions and $246 of asset-sale proceeds. Expansion capital was $370, acquisition capital $85 and maintenance capital $47. Cash distributions to common unitholders and the general partner totaled $433.
- Debt and liquidity: Total debt was $9,868 at quarter-end, down from $11,374 at December 31, 2015. Cash was $36; working capital was negative $283. Reported total liquidity was $3,831, including available facilities and cash, subject to covenant compliance. PAA said it was in compliance with covenants. Interest expense rose to $112 from $105.
- Capital and distributions: PAA raised approximately $1.6 billion net through a January private placement of about 61.0 million Series A preferred units. The units carry an 8% annual cumulative distribution; distributions through 2017 may be paid in cash or additional preferred units. The common-unit distribution was $0.70 for the quarter.
Material changes versus the prior comparable period
- Lower commodity prices reduced reported Supply and Logistics revenue and purchases, while segment profit was pressured by weaker margins and market conditions. WTI ranged from $26 to $41 per barrel in Q1 2016, versus $43 to $54 in Q1 2015.
- Transportation volumes increased 9%, including growth in the Permian Basin, but Western-region activity was affected by the Line 901/903 shutdown and refinery downtime. Facilities profit benefited from storage utilization and capacity expansions, partly offset by weaker rail activity.
- Adjusted EBITDA was stable despite lower GAAP net income. PAA reported $173 of selected items affecting EBITDA comparability in 2016, including derivative and inventory-related adjustments, long-term inventory costing adjustments, equity-indexed compensation and minimum-volume deficiencies.
- Debt declined alongside substantial net repayments under the commercial paper program and inventory facility, supported by operating cash, inventory liquidation and preferred-unit proceeds. The balance sheet added $1,509 of Series A preferred-unit capital.
Outlook, risks and unusual items
- Capital outlook: Management projected 2016 expansion capital of $1.4 billion to $1.6 billion and maintenance capital of $190 to $210. It expected preferred-unit proceeds to fund most of the remaining 2016 capital program. No specific earnings or distribution-growth guidance was provided.
- Market outlook: Management warned that lower North American production, compressed basis differentials, excess takeaway capacity and increased competition could constrain volumes, unit margins and cash-flow and distribution growth, particularly in Supply and Logistics. It also noted exposure to market volatility, weather-sensitive NGL demand, counterparties, financing conditions and project execution.
- Line 901 incident: The 2015 California crude-oil release remains subject to regulatory and criminal investigations, lawsuits and potential fines or penalties. Lines 901 and 903 were shut down, with no restart timeline. PAA estimated total incident costs of approximately $269; the remaining gross liability was $104 and the recognized insurance receivable was approximately $74. The company cautioned that costs could materially exceed its estimates.
- Other environmental matters: Total estimated environmental reserves, including Line 901, were $176 at March 31, 2016. Additional costs, claims or penalties may arise; amounts are subject to estimation uncertainty.
- Other unusual items and subsequent events: Q1 non-core asset sales generated approximately $56 of gains and $50 of impairment losses, including $15 of goodwill impairment. PAA signed an agreement in April to acquire Western Canadian NGL assets for about $150, subject to approvals and closing conditions; it also reported an additional approximately $100 non-core asset divestiture after quarter-end.
- Controls: Management concluded disclosure controls were effective as of March 31, 2016 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Line 901 and 903 can restart, and the ultimate cost, insurance recovery, penalties and litigation exposure from the Line 901 incident.
- Whether Supply and Logistics margins stabilize amid lower production, excess capacity and competition, and whether segment performance supports the distribution.
- Actual 2016 expansion and maintenance spending, project timing and returns, including the status of the announced acquisition and asset sales.
- Liquidity, refinancing and covenant capacity, including the August 2016 and January 2017 senior-note maturities and reliance on commercial paper and credit facilities.
- The economic and dilution implications of the 8% Series A preferred units, including in-kind distributions, conversion provisions and the distribution-rate reset feature.