Business context and reporting period
Plains All American Pipeline, L.P. (PAA) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. It transports, stores, terminals and markets crude oil and refined products, and handles natural gas liquids (NGL) and natural gas storage. Its segments are Transportation, Facilities, and Supply and Logistics. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $10,703 | $9,354 | $31,617 | $28,358 |
| Operating income | $296 | $247 | $1,333 | $1,023 |
| Net income | $237 | $173 | $1,074 | $797 |
| Net income attributable to PAA | $231 | $165 | $1,052 | $774 |
| Diluted net income per limited partner unit | $0.38 | $0.27 | $2.22 | $1.70 |
| Adjusted EBITDA (non-GAAP) | $480 | $502 | $1,697 | $1,497 |
| Implied distributable cash flow (non-GAAP) | $330 | $360 | $1,235 | $1,094 |
For the nine months, operating cash flow was $1,594, compared with $880 in 2012; investing cash flow was $(1,340), compared with $(2,376); and financing cash flow was $(242), compared with $1,501. Capital additions to property, equipment and other totaled $1,217. Cash and cash equivalents were $33 at quarter-end.
At September 30, total debt was $7,637, comprising $619 short-term debt and $7,018 long-term debt. Total assets were $20,267 and partners’ capital was $7,684. PAA reported a $134 working-capital surplus and $2,873 of available liquidity, including credit-facility capacity. It stated that it was in compliance with debt covenants.
Material changes versus the prior comparable period
- Nine-month net income attributable to PAA rose 36%, and diluted earnings per unit rose 31%. Management cited contributions from the USD Rail Terminal and BP NGL acquisitions, completed organic growth projects, and stronger NGL marketing results.
- Nine-month segment profit increased 17% to $1,640. Facilities segment profit rose 29% to $445 and Supply and Logistics rose 24% to $673; Transportation was nearly flat at $522.
- Q3 segment profit declined 12% to $408. Supply and Logistics profit fell 55% to $64, primarily reflecting narrower crude oil differentials and fewer favorable crude-market opportunities. Adjusted EBITDA fell 4% and implied DCF fell 8% year over year for the quarter.
- 2012 comparative depreciation and amortization included a $125 impairment, primarily for the Pier 400 terminal project, which PAA decided not to develop. This contributed to lower reported depreciation and amortization in 2013; excluding that impairment, depreciation and amortization increased, partly due to acquired and newly completed assets.
- Nine-month operating cash flow improved partly because of inventory reductions and related working-capital movements; it should not be viewed solely as a change in recurring earnings.
Outlook, commentary, risks and unusual items
- Management forecast 2013 expansion capital expenditures of $1.6 billion to $1.725 billion, subject to timing and scope changes. Nine-month acquisition capital was $19, internal growth spending was $1,253, and maintenance capital was $124.
- PAA declared a quarterly distribution of $0.6000 per limited partner unit, payable November 14, 2013, approximately 10.6% above the year-earlier distribution.
- On October 22, PAA announced a proposed merger to acquire the remaining publicly held PNG common units in exchange for 0.445 PAA units per PNG unit. Closing was expected in late Q4 2013 or Q1 2014, subject to approvals and other conditions. Lawsuits by purported PNG unitholders sought to stop or rescind the transaction and sought damages; PAA said it would defend the claims.
- PAA issued $700 of 3.85% senior notes due 2023 and established a commercial-paper program with a maximum outstanding amount of $1.5 billion. Its $250 of 5.63% senior notes matured in December 2013. Credit facility maturities were extended: PAA’s secured inventory facility to August 2016 and unsecured revolver to August 2018; PNG’s facilities to August 2017.
- Environmental reserve liabilities were approximately $99 at quarter-end. Pipeline incidents included the February Bay Springs release, with about $6 of cleanup and remediation costs recorded, and two 2013 Kemp River releases, with estimated costs of about $15 accrued. Regulatory actions and potential penalties remained possible for Canadian pipeline releases; the filing said none had been assessed for the cited releases as of the reporting date.
- Other material risks include commodity-market normalization and volatility, project execution and capital access, counterparty credit, weather-related interruptions, environmental liabilities, and integration of acquired assets. PAA uses derivatives for risk management; derivative fair values and timing of gains or losses can affect reported results.
Important facts for investors to verify
- Whether the weaker Q3 Supply and Logistics results reflect continued normalization in crude differentials, and the extent to which NGL margins and seasonal demand offset that pressure.
- Cash generation after working-capital and inventory movements, and whether forecast expansion spending is delivered within the stated range.
- Funding needs and leverage after the December 2013 note maturity, planned investment, distributions, and the proposed PNG merger.
- Merger approval, litigation outcomes, unit issuance and the effect of the agreed incentive-distribution-right reductions.
- Environmental remediation developments, insurance recoveries, regulatory findings and any additional liabilities or penalties.