Plains All American Pipeline, L.P. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; unaudited. Dollar amounts are in millions unless noted. The partnership transports, stores, terminals, supplies and markets crude oil, refined products and LPG, and operates natural gas storage facilities.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $6,124 | $4,282 | $12,248 | $7,585 |
| Operating income | $192 | $183 | $403 | $440 |
| Net income | $133 | $136 | $284 | $347 |
| Net income attributable to Plains | $131 | $136 | $282 | $347 |
| Basic / diluted income per limited partner unit | $0.65 / $0.65 | $0.79 / $0.78 | $1.45 / $1.45 | $2.20 / $2.18 |
- Revenue rose sharply, principally from Supply & Logistics activity and higher commodity prices; the business generally experiences corresponding increases in product purchase costs. Operating margin on reported revenue was approximately 3.1% in Q2 2010 versus 4.3% in Q2 2009, and 3.3% versus 5.8% for the respective six-month periods.
- Q2 segment profit was $130 Transportation, $70 Facilities and $57 Supply & Logistics, compared with $114, $52 and $78, respectively, a year earlier. Six-month segment profit was $257, $129 and $150, versus $226, $98 and $238.
- Transportation and Facilities improved, while Supply & Logistics segment profit fell 27% in Q2 and 37% for the half year. Management cited lower LPG volumes and margins, less favorable crude quality differentials and contango conditions; foreign exchange and inventory/linefill gains partly offset the decline.
- Q2 segment profit per barrel: Transportation $0.46 versus $0.41; Facilities $0.34 versus $0.29; Supply & Logistics $0.80 versus $1.11.
Cash flow, balance sheet and capital
- First-half operating cash flow was $283, compared with $287 in 2009. Investing cash use was $110, including $184 for acquisitions and $215 for property, equipment and other additions, offset in part by $268 proceeds from the PNG public offering. Financing cash use was $182; cash declined by $10 to $15.
- At June 30, total debt was $5,375, up from $5,216 at year-end 2009. Current liabilities were $3,377 and current assets $3,498, giving working capital of $121. Partners’ capital totaled $4,415; total assets were $12,368.
- Available liquidity was approximately $1,184: $874 under PAA’s revolving facility, $195 under PNG’s facility, $100 under the hedged-inventory facility and $15 cash. Management reported covenant compliance and considered liquidity sufficient, while noting that market disruption or adverse energy-price volatility could materially affect results and liquidity.
- First-half capital expenditures were $349, including $153 acquisition capital, $163 internal growth and $33 maintenance. Projected 2010 capital spending excluding acquisitions was $445, including $85 maintenance. The largest listed growth project was PAA Natural Gas Storage at $95.
- The declared quarterly distribution was $0.9425 per unit, payable August 13, 2010, a reported 4.1% year-over-year increase. First-half distributions paid to common unitholders and the general partner totaled $335.
Changes, outlook and notable disclosures
- PNG completed an IPO on May 5, selling approximately 23% of its equity for net proceeds of about $268; PAA retained 77% and continued consolidating PNG. PNG also entered a three-year $400 revolving facility, with $205 borrowed at quarter-end.
- In July, PAA issued $400 of 3.95% senior notes due 2015 and used the proceeds to repay credit-facility borrowings. The filing gives capital-spending expectations but no clear full-year earnings or distribution guidance beyond the declared distribution.
- Management said the interim results should not be taken as indicative of full-year results. PAA identified commodity-market structure and volatility, operating volumes, acquisitions and integration, financing access, Canadian-dollar movements, weather, counterparties and regulation as risks.
- Environmental reserve was $61 ($9 short-term and $52 long-term), with about $5 of related recovery receivables. A July 2010 flood-related pipeline break near Lubbock, Texas, occurred after quarter-end; the company estimated up to 165 barrels may have been released.
- Other contingencies include DOJ/EPA proceedings concerning historical oil releases, with penalties considered probable and maximum statutory penalties estimated at about $6.8; SemCrude-related claims of approximately $23 under challenge; and environmental matters involving the PAT terminal and RMPS. The company stated it did not believe legal proceedings would materially adversely affect it, but noted reserves and remediation estimates are uncertain.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the period.
Key facts for investors to verify
- Whether Supply & Logistics margins and segment profit recover, given the marked year-over-year decline despite substantial revenue growth.
- Execution, timing and funding of the $445 projected 2010 capital program, including PNG storage expansion and pending pipeline asset purchases.
- Debt-service capacity, credit-facility availability and compliance with covenants as borrowings and investment requirements evolve.
- Whether the declared distribution is supported by recurring cash generation, considering working-capital needs, inventory financing and the partnership’s distribution policy.
- Updates on the July pipeline release, environmental reserves and the pending DOJ/EPA and other legal matters.