Plains All American Pipeline, L.P. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Amounts are in U.S. dollars; financial statement amounts are in millions except per-unit data. Plains transports, stores, terminals and markets crude oil, refined products and NGL, and operates natural gas storage through its three segments: Transportation, Facilities, and Supply and Logistics.
Key financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $9,786 | $8,859 | $19,004 | $16,553 |
| Operating income | $462 | $298 | $776 | $583 |
| Net income | $386 | $233 | $624 | $418 |
| Net income attributable to Plains | $378 | $225 | $609 | $408 |
| Diluted net income per limited partner unit | $1.85 | $1.13 | $2.88 | $2.03 |
| Adjusted EBITDA | $522 | $366 | $995 | $714 |
| Implied distributable cash flow (DCF) | $390 | $259 | $732 | $498 |
For the first half, operating cash flow was $348 million versus $972 million a year earlier; investing cash flow was negative $2.038 billion and financing cash flow was positive $1.678 billion. Cash ended June at $12 million. Management attributed the year-over-year operating cash flow decline primarily to increased crude oil and NGL inventories, contrasting with inventory liquidation that benefited 2011 cash flow.
At June 30, total debt was $6.790 billion, compared with $5.199 billion at year-end 2011. Current assets of $4.676 billion and current liabilities of $4.814 billion yielded a $138 million working capital deficit. The partnership reported $2.755 billion of available liquidity, including credit-facility availability and cash, and said it was compliant with covenants. A $500 million 4.25% senior note maturity was due in September 2012.
Changes and operating performance
- Q2 revenue rose about 10% and net income attributable to Plains rose 68% year over year; first-half attributable net income increased 49%. Diluted earnings per unit increased 64% for Q2 and 42% for the first half.
- Segment profit increased in Q2: Transportation to $169 million from $128 million, Facilities to $114 million from $86 million, and Supply and Logistics to $274 million from $151 million. First-half segment profit was $332 million, $204 million and $402 million, respectively.
- Management cited higher transportation utilization, North American production growth, acquisitions and expansions, and stronger lease-gathering volumes and crude differentials. Supply and Logistics segment profit per barrel was $3.10 in Q2 versus $2.04; Transportation was $0.52 versus $0.46, while Facilities was $0.35 in both periods.
- The BP NGL acquisition closed April 1 for approximately $1.68 billion, subject to adjustments. Acquired assets included NGL pipelines, storage, fractionation and processing capacity. Acquisition-related capital spending contributed to higher depreciation, operating costs and interest expense.
Outlook, distributions and notable items
- Management forecast 2012 expansion capital expenditures of $1.1–$1.25 billion and maintenance capital of $140–$160 million. No full-year earnings or DCF guidance is stated in the provided filing text.
- The announced quarterly distribution was $1.065 per unit, payable August 14, 2012, an approximately 8.4% year-over-year increase. The general partner agreed to reduce incentive distributions in connection with the BP acquisition.
- A noncash $121 million inventory valuation charge was recorded in Q2 following commodity price declines; substantially offsetting unrealized derivative gains were recorded in revenue. Q2 results also included significant derivative and currency movements; adjusted EBITDA excludes specified comparability items.
- On June 7, a crude oil release near Sundre, Alberta, was estimated at less than 1,000 barrels. Estimated cleanup and remediation costs were about $53 million before insurance; $48 million remained accrued at quarter-end, with a $42 million probable insurance receivable. Total environmental reserves were $134 million, with $57 million of related recovery receivables.
- Management warned that elevated Supply and Logistics margins could normalize as regional takeaway constraints ease. Key risks include acquired-asset integration, commodity differentials and volatility, counterparty and financing access, environmental liabilities, insurance limitations, project execution and Canadian-dollar movements. Plains had elected to self-insure hurricane property risk.
Most important facts for investors to verify
- Whether the BP NGL assets deliver expected earnings and cash flow, and whether preliminary purchase accounting or working-capital adjustments change.
- How the September 2012 note maturity was funded and whether reported liquidity and covenant compliance remain adequate after acquisition and planned capital spending.
- Whether operating cash flow and distribution coverage improve as inventory and working-capital requirements change; assess the distinction between GAAP results and adjusted EBITDA/DCF.
- Final Rangeland remediation costs and insurance recovery, overall environmental reserve adequacy, and developments in the Pemex litigation and other remediation disputes.
- Whether supply-and-logistics margins, commodity hedge results and the announced distribution remain sustainable as market conditions and infrastructure constraints evolve.