Plains All American Pipeline, L.P. — 2014 Third-Quarter Form 10-Q
Business context and period. PAA owns and operates midstream energy infrastructure and provides logistics services for crude oil, natural gas liquids (NGL), natural gas and refined products in the United States and Canada. Its segments are Transportation, Facilities, and Supply and Logistics. This unaudited filing covers the three and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods. Amounts below are in millions unless otherwise stated.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $11,127 | $10,703 | $34,005 | $31,617 |
| Operating income | $404 | $296 | $1,261 | $1,333 |
| Net income attributable to PAA | $323 | $231 | $994 | $1,052 |
| Basic net income per limited partner unit | $0.52 | $0.38 | $1.71 | $2.23 |
| Adjusted EBITDA (non-GAAP) | $527 | $480 | $1,606 | $1,697 |
| Implied distributable cash flow (non-GAAP) | $369 | $330 | $1,145 | $1,235 |
- Revenue increased 4% in Q3 and 8% for the nine-month period. Supply and Logistics represents most reported revenue, but its commodity purchases and sales make revenue a high-volume, low-margin measure.
- Q3 segment profit was $231 Transportation, $147 Facilities and $152 Supply and Logistics, totaling $530, up 30%. Nine-month segment profit was $658, $435 and $534, respectively, totaling $1,627, down 1%.
- Cash from operations was $1,278 for the first nine months, versus $1,594 in 2013. Investing used $1,664, including $1,424 of property and equipment additions. Financing provided $380; cash ended at $34, down from $41 at year-end 2013.
- At September 30, total debt was $8,589, versus $7,828 at December 31, 2013. Current liabilities exceeded current assets by $408. PAA reported approximately $2,545 of liquidity, including $2,511 of facility availability net of commercial-paper borrowings and $34 cash.
- Quarterly distribution declared for Q3 was $0.6600 per unit, payable November 14, 2014, up from $0.6450 for the prior quarter. Nine-month implied DCF exceeded distributions paid by $67; Q3 implied DCF was $5 below distributions paid.
Changes versus the prior comparable periods
- Q3 net income attributable to PAA rose 40%, while nine-month net income fell 6%; nine-month per-unit earnings declined 23%, with weighted-average limited partner units increasing 7%.
- Transportation benefited from higher crude-oil volumes and recently completed projects, particularly in the Permian, Eagle Ford and Mid-Continent areas. Segment profit rose 17% in Q3 and 26% year to date.
- Supply and Logistics profit increased sharply in Q3, to $152 from $64, but fell 21% year to date. Q3 results included a favorable year-over-year comparison in certain derivative gains and better crude-oil marketing opportunities; weaker NGL margins and fewer crude-oil margin opportunities earlier in the year weighed on the nine-month result.
- Facilities profit was nearly flat in Q3 and down 2% year to date. Lower natural-gas storage revenue and severe-winter operating costs offset higher fees from certain NGL facilities and other growth.
- Interest expense increased to $246 for the first nine months from $224, primarily reflecting higher average debt. Depreciation and amortization increased to $293 from $265, including costs from growth projects and accelerated depreciation on certain pipelines.
Outlook, risks and unusual items
- Management forecast 2014 expansion capital expenditures of $1.95–$2.15 billion, subject to timing and scope adjustments; nine-month internal growth-project spending was $1.552 billion. No earnings or full-year cash-flow guidance is provided in the supplied filing text.
- In November 2014, PAA agreed to buy Oxy’s 50% interest in BridgeTex for $1.075 billion. Closing was conditional, including on a PAGP secondary offering before December 31, 2014 and related transaction steps. PAA expected initially to use commercial-paper borrowings and stated a long-term funding intention of at least 55% from equity and excess cash flow over distributions.
- Credit facilities were extended by one year in August: the secured hedged-inventory facility matures in August 2017 and the unsecured revolving facility in August 2019. The commercial-paper program’s maximum capacity increased from $1.5 billion to $3.0 billion effective October 20, 2014. PAA said it complied with debt covenants at quarter-end.
- Severe cold in early 2014 drove natural-gas storage deliverability costs and a $37 inventory writedown. Management also cited NGL marketing weakness, normalizing crude-oil logistics margins, Canadian-dollar exposure, execution and timing risks for expansion projects, and reliance on continued access to capital markets.
- Environmental reserves were $87, including $13 short-term. PAA warned actual remediation costs could exceed reserves. Cleanup estimates included approximately $15 for the Kemp River releases, of which $8 had been spent by quarter-end; possible penalties remained unresolved. Management did not expect ordinary-course litigation, individually or in aggregate, to materially adversely affect the partnership.
- Derivatives are used for risk management, but fair values and earnings can vary with commodity, interest-rate and currency markets. The filing reported a $118 net loss deferred in accumulated other comprehensive income for derivatives, with actual future reclassifications subject to market changes.
Important facts for investors to verify
- Whether the BridgeTex acquisition and its financing conditions were completed, and the resulting debt, equity issuance and distribution coverage.
- Whether planned 2014 expansion spending stayed within the $1.95–$2.15 billion range and projects entered service on schedule and budget.
- Whether operating cash flow and implied DCF support distributions as growth spending and debt service continue.
- How much of the year-to-date earnings decline reflects recurring segment performance versus weather costs, derivative timing, inventory valuation and other comparability items.
- Whether environmental remediation reserves and potential penalties, particularly for the cited pipeline releases, prove adequate.