PLAINS ALL AMERICAN PIPELINE LP quarterly report, Q1 FY2010

Plains All American Pipeline, L.P. — Q1 2010 Form 10-Q

Reporting period: Three months ended March 31, 2010; comparative period is Q1 2009. Amounts are in U.S. dollars and millions unless stated otherwise. Plains operates transportation, facilities, and supply and logistics businesses serving crude oil, refined products, LPG, and natural gas storage markets.

Financial performance and position

Metric	Q1 2010	Q1 2009 / comparison
Total revenue	$6,125	$3,302; up 86%
Operating income	$211	$256; down 18%
Net income	$151	$211; down 28%
Net income attributable to limited partners	$112	$180
Basic / diluted earnings per unit	$0.80 / $0.80	$1.42 / $1.41
Operating cash flow	$391	$478
Cash capital additions and other	$104	$116
Total debt at March 31	$5,095	$5,216 at Dec. 31, 2009
Cash at March 31	$16	$25 at Dec. 31, 2009

• Revenue growth was largely associated with higher commodity prices and higher dollar volumes in supply and logistics; it did not translate into higher earnings. Purchases and related costs rose to $5,623 from $2,790. The filing cautions that commodity-indexed revenue and costs can expand with prices without a corresponding margin increase.
• Segment profit was $279, down 12% from $317. Transportation rose 13% to $127 and facilities rose 28% to $59, while supply and logistics fell 42% to $93. Supply and logistics profit per barrel decreased to $1.22 from $2.04.
• Transportation throughput volumes declined 4% year over year. Facilities segment results benefited in part from the 2009 PNGS acquisition and completed expansion projects. Supply and logistics volumes declined 2%.
• Interest expense increased to $58 from $51; depreciation and amortization rose to $67 from $58. The reported operating margin was approximately 3.4% of revenue versus 7.8% in Q1 2009, a comparison influenced by the large commodity-related revenue base.
• Working capital was negative by approximately $155. The company reported about $1.06 billion of available liquidity: $944 of revolver capacity, $100 of hedged-inventory facility capacity, and $16 cash. Management said it was in compliance with debt covenants.
• Current liabilities were $3,496, including $951 of short-term debt. Senior notes were $4,136 net of discount; total long-term debt was $4,144. Cash interest paid was $60.

Material changes and notable items

• Supply and logistics results were weaker mainly because of less favorable commodity differentials, a weaker contango market, lower derivative gains net of inventory valuation adjustments, adverse January–February weather, and approximately $9 of lower LPG marketing margins associated with warmer weather. Management noted that Q1 2010 derivative gains generally had offsetting future physical positions not reflected in mark-to-market results.
• Transportation profit improved despite lower throughput, aided by tariff increases, foreign-currency translation, and higher loss-allowance revenue. Facilities profit benefited from acquisitions and expansions, including increased natural gas storage capacity following the PNGS acquisition.
• Operating cash flow declined year over year. Inventory liquidation, particularly LPG, generated cash used to repay credit-facility borrowings; crude oil inventory and prices partly offset the LPG inventory decline.
• Other comprehensive income was $63, including a $54 currency translation adjustment; comprehensive income was $214 versus $91 in Q1 2009.
• On May 5, 2010, after quarter-end, PNG completed an IPO raising approximately $269 net and borrowed approximately $200 under a new $400 revolving facility. Plains retained 77% of PNG. Proceeds were expected to repay intercompany debt owed to Plains, which expected to use the funds to reduce its own facility borrowings and for general partnership purposes. Pro forma liquidity including PNG was estimated at approximately $1.7 billion.

Outlook, distributions, risks, and contingencies

• Management forecast 2010 capital expenditures, excluding acquisitions, of $445: $360 for growth projects and $85 for maintenance. Q1 growth-project spending was $76 and maintenance capital was $11.
• The partnership declared a quarterly distribution of $0.9350 per unit, payable May 14, 2010, up approximately 3.3% year over year. It paid $166 in distributions to common unitholders and the general partner during Q1.
• Management described liquidity and financial position as adequate, but cautioned that prolonged financial-market disruption or energy-price volatility could materially affect financial condition, results, or cash flow. Results are not necessarily indicative of the full year.
• Key business exposures include commodity price and basis volatility, weather-sensitive LPG demand, pipeline throughput and production levels, counterparty and financing access, Canadian-dollar fluctuations, acquisition integration, and construction and operating risks at natural gas storage facilities. Derivatives are used principally for risk management; reported fair values and realized results can vary with market conditions.
• Environmental liabilities totaled approximately $63 at quarter-end, with $9 short-term and $54 long-term; $4 of probable insurance or third-party recoveries was recorded. Management warned actual remediation costs could exceed reserves. Insurance availability and coverage were also identified as concerns.
• Notable legal matters include Clean Water Act penalty discussions concerning historic Texas pipeline releases (estimated aggregate release costs of $5–$6; management considered penalties probable), SemCrude claims under challenge of approximately $23, and several Pacific legacy environmental and regulatory matters. A Line 63 consent decree required further work estimated at less than $6, with the affected segment out of service pending requirements for return to service.
• The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Most important facts for investors to verify

• Whether the sharp drop in supply and logistics segment profit reflects temporary market conditions or a sustained reduction in margins, and how derivative gains relate to future physical transactions.
• Liquidity and covenant headroom after the PNG IPO-related repayments, including the availability and terms of the revolving and hedged-inventory facilities.
• Execution and funding of the $445 capital program, and the sustainability of the declared distribution relative to operating cash flow and future capital needs.
• Potential outcomes and cash costs of environmental reserves, the historic release penalty discussions, SemCrude litigation, and other Pacific legacy matters.
• Exposure to near-term debt maturities, commodity-price and basis movements, weather, counterparty credit, and changes in insurance costs or coverage.