Plains All American Pipeline, L.P. — Q3 2015 Form 10-Q
Business and period. PAA owns and operates midstream energy infrastructure and logistics services for crude oil, NGL, natural gas and refined products in the U.S. and Canada. The unaudited filing covers the three and nine months ended September 30, 2015; balance-sheet comparisons are against December 31, 2014. Amounts are in U.S. dollars and millions unless noted.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $5,551 | $11,127 | $18,156 | $34,005 |
| Operating income | $333 | $404 | $911 | $1,261 |
| Net income attributable to PAA | $249 | $323 | $657 | $994 |
| Basic net income per limited partner unit | $0.25 | $0.52 | $0.54 | $1.71 |
| Adjusted EBITDA (non-GAAP) | $497 | $527 | $1,605 | $1,606 |
| Implied DCF (non-GAAP) | $338 | $369 | $1,088 | $1,145 |
- Cash flow: Nine-month cash from operations was $1,222, versus $1,278 in 2014. Investing used $2,069, including $1,617 for property, equipment and other additions. Financing provided $469. Cash declined to $22 from $403 at year-end 2014.
- Capital and liquidity: Total assets were $22,217. Debt was $10,651, up from $10,049 at year-end; senior notes were $9,757 and short-term debt $681. Working capital deficit was $520. Management reported total available liquidity of $3,092 and covenant compliance.
- Distribution coverage: Nine-month distributions paid were $1,281 against implied DCF of $1,088, a reported shortfall of $193. The Q3 distribution was declared at $0.7000 per unit, payable November 13, 2015; management described this as a 6.1% year-over-year increase.
- Margins: The filing does not present a single conventional consolidated operating margin as a principal performance measure. Supply and Logistics segment profit per barrel fell 43% in Q3 and 54% for the nine-month period year over year.
Material changes versus prior periods
- Revenue fell 50% in Q3 and 47% for the first nine months, largely reflecting lower commodity prices and lower reported Supply and Logistics sales and purchase amounts. These revenue changes should not be read as equivalent changes in underlying profitability.
- Nine-month net income attributable to PAA declined 34%; Q3 declined 23%. Management cited weaker Supply and Logistics results, Line 901 costs and lost revenue, and higher depreciation and interest expense.
- Supply and Logistics segment profit declined 43% in Q3 and 52% year to date, as compressed crude differentials and increased competition reduced margins. Adjusted EBITDA was nearly flat year to date after adjustments, but declined 6% in Q3.
- Transportation segment profit rose 10% in Q3 and 3% year to date, supported by higher throughput and tariff rates; Facilities segment profit was broadly flat.
- Debt increased despite repayment of $550 million of notes, following issuance of $1.0 billion of 4.65% notes due 2025. PAA also raised approximately $1.1 billion in a March unit offering; common units outstanding increased to 397.7 million from 375.1 million at year-end.
Outlook, risks and unusual items
- Capital plan: Management forecast 2015 expansion capital of $2.1–$2.3 billion and maintenance capital of $200–$220 million. Nine-month spending was $1.837 billion on expansion and $154 million on maintenance. Most expansion spending was expected to benefit 2016 and later periods.
- Market outlook: Management said lower oil prices, slower North American production growth, compressed differentials and increased competition may constrain volumes, unit margins, cash-flow growth and distribution growth. Excess takeaway capacity and asset underutilization were also cited as potential pressures.
- Line 901 release: A May 2015 crude oil release in California led to pipeline shutdowns, investigations, claims and litigation. PAA estimated total costs of approximately $257 million, including projected response, remediation, claims, fines, penalties and legal costs; this estimate excluded lost revenue from the Line 901 and 903 shutdowns. At September 30, the remaining gross liability was $126 million and a $192 million insurance receivable had been recognized. Further costs could exceed estimates, and restart timing was not established.
- Other incidents and proceedings: A July Illinois release was estimated to cost less than $10 million. The filing also describes regulatory matters involving pipeline safety, tank protection, air permits and earlier releases. Management said the broader legal proceedings were not expected to have a material adverse effect, while noting uncertainty and potential additional penalties.
- Other notable items: PAA recorded $65 million of Line 901 costs net of probable insurance recoveries in nine-month segment results. Long-term inventory costing adjustments reduced results by $62 million year to date. Other comprehensive loss was $518 million, primarily reflecting $469 million of currency translation loss.
- Additional risks: Commodity-market structure, production declines, counterparty credit, Canadian-dollar movements, project execution, financing-market access and environmental liabilities may affect results and liquidity. Management stated that it used derivatives for risk management rather than outright commodity speculation.
Investor verification priorities
- Track Line 901 and Line 903 restart plans, investigations, litigation, insurance recoveries and whether total costs exceed the $257 million estimate.
- Assess recurring distribution coverage: implied DCF was below distributions paid by $193 million for the first nine months; review the non-GAAP reconciliation and reserves.
- Monitor Supply and Logistics unit margins, crude differentials, competition and production/throughput trends, rather than revenue alone.
- Verify delivery and returns on the $2.1–$2.3 billion expansion-capital plan, and funding needs relative to debt, unit issuance and available liquidity.
- Review debt maturities, commercial-paper dependence, interest expense and the sustainability of available liquidity if operating cash flow weakens.