Plains All American Pipeline, L.P. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; comparisons are primarily with 2012. The filing also reports fourth-quarter results. Amounts are in U.S. dollars unless noted.
Business context
PAA is a North American midstream energy partnership operating crude oil and NGL pipelines, gathering systems, terminals, storage, processing and fractionation assets, and supply and logistics businesses. Its three segments are Transportation, Facilities, and Supply and Logistics. Fee-based Transportation and Facilities activities are designed to provide a stable earnings base; Supply and Logistics margins are more exposed to market structure, volatility and differentials.
Financial results and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $42.249 billion | $37.797 billion | Up 12% |
| Operating income | $1.728 billion | $1.425 billion | Up 21% |
| Net income attributable to PAA | $1.361 billion | $1.094 billion | Up 24% |
| Diluted net income per limited partner unit | $2.80 | $2.40 | Up 17% |
| Adjusted EBITDA (non-GAAP) | $2.292 billion | $2.107 billion | Up 9% |
| Implied distributable cash flow (non-GAAP) | $1.665 billion | $1.550 billion | Up 7% |
| Net cash from operating activities | $1.954 billion | $1.240 billion | Up $714 million |
| Total debt at year-end | $7.828 billion | $7.406 billion | Up $422 million |
- Segment profit was $729 million in Transportation, $616 million in Facilities and $822 million in Supply and Logistics; total segment profit rose 11% to $2.167 billion.
- Operating margin was approximately 4.1% versus 3.8% in 2012; net margin was approximately 3.3% versus 3.0%, calculated from reported figures.
- Capital expenditures were $1.817 billion: $1.622 billion for internal growth, $176 million for maintenance and $19 million for acquisitions. Separately, the December 31 PNG merger was completed primarily through issuance of approximately 14.7 million PAA units valued at about $760 million.
- Cash and cash equivalents were $41 million. The partnership reported a $447 million working-capital deficit and $1.891 billion of total available liquidity, including undrawn facility capacity net of commercial paper borrowings. It was in compliance with debt covenants.
- Long-term debt was $6.715 billion and short-term debt $1.113 billion. About $6.7 billion was fixed-rate and $1.1 billion variable-rate. Senior notes had an approximately 11-year weighted-average life.
- Implied DCF exceeded distributions paid by $450 million; the filing separately states distribution coverage of approximately 143%. Distributions declared per unit for 2013 totaled about $2.33; the annualized rate increased 10.6% to $2.40 during the year. The fourth-quarter distribution was $0.615 per unit, paid in February 2014.
- Fourth-quarter 2013 revenue was $10.631 billion, net income attributable to PAA was $309 million, and diluted earnings were $0.58 per unit. Comparable fourth-quarter 2012 figures were $9.439 billion, $320 million and $0.69 per unit, respectively.
Material changes versus prior period
- Net income attributable to PAA increased $267 million. Management cited contributions from the BP NGL and USD rail-terminal acquisitions, growth projects, and stronger NGL marketing margins. Narrower crude oil differentials offset some gains.
- Facilities segment profit increased 28%, supported by rail activity, acquired NGL assets and expansions. Transportation segment profit increased 3%, despite higher volumes, as Canadian pipeline flooding, diversion of some production to rail and lower loss-allowance revenue weighed on results.
- Supply and Logistics segment profit increased 9%. Higher NGL demand and margins helped, while improved infrastructure reduced some crude oil transportation constraints and differential opportunities.
- Operating cash flow rose substantially, helped by liquidation of crude oil and NGL inventory accumulated earlier. In contrast, operating cash flow had been pressured in 2012 by inventory growth.
- Depreciation and amortization fell to $375 million from $482 million, principally because 2012 included approximately $168 million of impairment charges. 2013 included approximately $20 million of impairments.
- Debt increased, while the partnership raised $477 million net through its continuous unit offering program and issued $700 million of 3.85% senior notes. The PNG merger consolidated the remaining publicly held PNG interests; PAA issued units and repaid PNG debt at closing.
Outlook, commentary, risks and unusual items
- Management described North American crude oil production growth and infrastructure needs as favorable for its assets, but cautioned that lower oil prices, reduced producer capital access, new competing infrastructure and normalized differentials could limit volumes or margins.
- The 2014 expansion-capital plan was approximately $1.7 billion, with an estimated range of $1.6 billion to $1.8 billion. Major projects include Permian Basin pipelines, the Cactus Pipeline, rail facilities, Canadian NGL storage and pipeline work, and Eagle Ford expansions. Funding was expected from operating cash flow, credit facilities and commercial paper, and potential debt or equity issuance.
- Management reported that 2013 adjusted EBITDA and DCF exceeded its original guidance by approximately 13% and 15%, respectively. It reported executing the $1.62 billion expansion program generally on time and on budget. The filing does not provide a clear quantified 2014 earnings or DCF forecast in the material summarized here.
- Natural gas storage remained a challenging market, with low seasonal spreads and lower lease rates; management was more optimistic about intermediate- to long-term demand but noted near-term uncertainty.
- Environmental exposures include the 2011 Rainbow release (about 28,000 barrels; approximately $70 million spent through 2013), the 2012 Rangeland release (about 3,000 barrels; approximately $46 million spent), and 2013 Bay Springs and Kemp River releases. Environmental reserves were $93 million at year-end, partly offset by $10 million of probable recoveries. Additional penalties or remediation costs remain possible.
- Crude-by-rail safety scrutiny increased after rail accidents. Future tank-car standards or other regulation could require material spending; the ultimate impact was uncertain. PAA had also elected to self-insure hurricane property-damage risk.
- Other key risks include commodity-market transitions or low volatility, customer and counterparty credit risk, project delays or cost overruns, capacity overbuild, interest-rate and currency movements, environmental regulation, and access to capital. The partnership’s significant distribution obligations and incentive distribution rights may affect retained cash and financing needs.
- PNG merger litigation remained in state and Delaware courts; the federal consolidated action was dismissed in February 2014. PAA said it would defend the remaining actions and could not predict their outcome. PEP claims against Plains Marketing were dismissed by judgment in February 2014, subject to appeal.
Most important facts for investors to verify
- Reconcile the reported 143% distribution coverage with the $1.665 billion implied DCF and $1.215 billion of distributions, including the filing’s definitions and adjustments for non-GAAP measures.
- Review the composition and duration of the $1.891 billion liquidity figure, commercial paper usage, facility covenants and debt maturities.
- Test whether the 2014 growth-capital program, project commitments and expected returns are supported by shipper contracts, permits and timely construction.
- Assess sensitivity of Supply and Logistics earnings to crude differentials, contango/backwardation, NGL demand and volatility, and consider whether 2013 margins were repeatable.
- Monitor environmental remediation estimates, potential penalties, insurance recoveries and the remaining PNG merger litigation.
- Consider dilution and cash-allocation effects from unit issuance, incentive distribution rights, the PNG merger and general-partner arrangements.
Financial statements were audited by PricewaterhouseCoopers LLP, which expressed an unqualified opinion and concluded that internal control over financial reporting was effective as of December 31, 2013.