Plains All American Pipeline, L.P. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; filed February 25, 2011. This is an annual filing, not a standalone fourth-quarter report. Amounts are in U.S. dollars unless stated otherwise.
Business context
PAA transports, stores, terminals and markets crude oil, refined products and LPG in the U.S. and Canada, and participates in natural gas storage through its majority-owned subsidiary PNG. Its three segments are Transportation, Facilities, and Supply and Logistics. Transportation and Facilities are primarily fee-based; Supply and Logistics involves higher-volume commodity purchases and sales, with results affected by market structure, differentials and inventory activity.
Financial performance and liquidity
| Metric | 2010 | 2009 |
|---|---|---|
| Total revenue | $25.893 billion | $18.520 billion |
| Operating income | $767 million | $779 million |
| Net income attributable to Plains | $505 million | $579 million |
| Diluted net income per unit | $2.40 | $3.32 |
| Adjusted EBITDA (non-GAAP) | $1.106 billion | $1.022 billion |
| Distributable cash flow (non-GAAP) | $757 million | $692 million |
| Cash provided by operating activities | $259 million | $365 million |
| Total debt at year-end | $5.957 billion | $5.216 billion |
| Cash and cash equivalents at year-end | $36 million | $25 million |
- Revenue rose 40%, largely reflecting greater commodity sales volumes and prices; revenue is not a direct measure of PAA’s margin. Net income attributable to Plains fell 13%, and diluted earnings per unit fell 28%.
- Segment profit was $516 million in Transportation (+8%), $270 million in Facilities (+30%), and $240 million in Supply and Logistics (−30%). The latter was pressured by weaker LPG margins, derivative results and less favorable crude differentials and market structure.
- Adjusted EBITDA increased 8% and DCF increased 9%, despite lower GAAP net income. These are non-GAAP measures; the filing provides reconciliations.
- Operating cash flow declined 29%. PAA attributed the reduction in part to increased inventory, financed through borrowings and senior notes; inventory rose to $1.491 billion from $1.157 billion.
- Year-end working capital surplus was approximately $166 million. Reported available liquidity was approximately $877 million, including $701 million available under PAA’s revolving facility, $140 million under PNG’s facility and $36 million cash. The $500 million hedged-inventory facility was fully drawn.
- Declared distributions were $3.76 per common unit for 2010, versus $3.62 in 2009. The fourth-quarter distribution of $0.9575 per unit was paid in February 2011.
Material changes and significant items
- Facilities segment profit benefited from asset additions and expansion projects, including increased natural-gas storage capacity. Transportation profit benefited from higher tariffs, Canadian-dollar appreciation and increased Capline volumes.
- Equity compensation expense increased to $98 million from $68 million, while depreciation and amortization rose to $256 million and interest expense to $248 million.
- PAA completed the PNG initial public offering in May 2010, raising approximately $268 million for PNG and retaining approximately 77% ownership at year-end. PNG’s February 2011 unit issuance and PAA’s purchase of additional units reduced PAA’s ownership to approximately 64%.
- PAA acquired Nexen’s Bakken-area gathering and transportation assets for approximately $229 million in December 2010. In February 2011, PNG acquired Southern Pines, a natural-gas storage facility, for approximately $746 million, subject to adjustments.
- 2010 capital expenditures included $407 million for acquisitions, $355 million for internal growth and $93 million for maintenance. Management projected $550 million of expansion capital for 2011.
Outlook, risks and contingencies
- Management described the economic recovery as uncertain and expected it to be slow, while citing favorable crude-oil production and changing flows as potential sources of demand for PAA’s infrastructure. Management said 2010 adjusted EBITDA exceeded the high end of original guidance, excluding unforecasted acquisitions; the filing does not provide a clear numerical 2011 earnings forecast.
- Natural-gas storage markets were soft: seasonal price spreads had fallen to low levels, which management said could weigh on storage demand and value, although it viewed the long-term outlook as positive.
- Key risks include leverage and refinancing needs, access to capital and supplier credit, counterparty credit exposure, commodity-market and derivative risks, volume declines or interruptions, acquisition and project execution, regulatory rate limits, environmental liabilities, pipeline integrity, and insurance availability. PAA reported covenant compliance at year-end.
- Total debt was approximately $6.0 billion, including $1.326 billion of short-term debt. PAA’s revolving facility matures in July 2012, and the hedged-inventory facility in October 2011. Post-year-end, PAA issued $600 million of 5.00% notes due 2021, entered a $500 million 364-day facility, and redeemed approximately $222 million of 7.75% notes due 2012.
- Environmental reserves were approximately $66 million, with $5 million of recorded recovery receivables. The 2010 EPA/DOJ consent decree addressed multiple oil releases; PAA paid $3.25 million in penalties, which had been reserved. Other disclosed matters include the SemCrude producer-lien litigation, Paulsboro contamination claims and an EPA inquiry involving Colorado terminals.
- Following a January 1, 2011 restructuring, all Canadian operations are conducted through entities subject to Canadian corporate income tax. Management expected income-tax expense to increase in 2011.
Important facts for investors to verify
- Review the reconciliation and assumptions behind adjusted EBITDA and DCF, and distinguish those measures from GAAP earnings and operating cash flow.
- Assess whether inventory-related borrowing and working-capital swings affect cash available for distributions, and verify current facility availability and covenant headroom.
- Check the financing, integration and expected contribution of the Nexen and Southern Pines acquisitions, including PAA’s reduced ownership of PNG.
- Track delivery of the 2011 growth-capital program, project costs and permits, especially natural-gas storage expansions and the proposed Pier 400 project.
- Monitor environmental reserves, unresolved legal claims, pipeline integrity spending and any changes to insurance coverage or regulatory requirements.