Plains All American Pipeline, L.P. — Q2 2009 Form 10-Q
Reporting period: Three and six months ended June 30, 2009. Unaudited results; the partnership cautioned that interim results are not necessarily indicative of full-year results. Plains operates transportation, facilities and marketing businesses focused on crude oil, refined products and LPG.
Financial performance
Amounts below are in millions except per-unit data. Comparisons are with the same 2008 period.
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Total revenue | $4,282 | $9,060 | $7,585 | $16,255 |
| Operating income | $183 | $81 | $440 | $208 |
| Net income | $136 | $41 | $347 | $133 |
| Net income per limited partner unit, diluted | $0.78 | $0.09 | $2.18 | $0.64 |
| Operating cash flow | Not separately presented for the quarter | $287 | $576 |
- Q2 operating margin was approximately 4.3%, versus 0.9% a year earlier; six-month operating margin was approximately 5.8%, versus 1.3%. These are calculated from reported operating income and revenue.
- Segment profit for Q2 was $114 transportation, $52 facilities and $78 marketing, compared with $106, $36 and a $5 loss, respectively, in Q2 2008. Six-month segment profit was $226, $98 and $238, respectively, versus $195, $68 and $52.
- Six-month operating cash flow fell to $287 from $576, principally reflecting working-capital movements, including increased inventory. Investing activities used $253; financing activities used $38. Cash ended the period at $7.
- Total debt was $4,336 at June 30, up from $4,286 at year-end 2008. Current liabilities exceeded current assets by approximately $286. Plains reported approximately $1.2 billion available under its revolving credit facility and $89 million under its hedged inventory facility, and said it was in compliance with debt covenants.
Material changes and drivers
- Revenue declined sharply as lower commodity prices reduced the dollar value of marketing sales; the filing reports Q2 crude oil prices ranging from $45 to $73 per barrel, versus $100 to $143 in Q2 2008. Revenue decline did not translate into lower earnings because purchase costs also fell and margins improved.
- Management attributed stronger marketing results to favorable crude-oil contango, higher LPG margins and derivative mark-to-market results. Q2 2009 included approximately $18 million of gains tied to derivative positions for later physical activity; Q2 2008 included approximately $87 million of losses on such positions.
- Transportation benefited from tariff increases, Rainbow acquisition volumes and expansion activity. Facilities benefited from expansion projects, acquisitions and higher lease rates. Marketing volumes were lower, including fewer waterborne crude imports where profitable opportunities were lacking.
- Interest expense increased to $56 in Q2 from $49 and to $107 for six months from $91, reflecting debt issuance and lower capitalized interest, partly offset by lower variable borrowing rates. Equity compensation expense was $30 for six months, versus $24.
- Other comprehensive loss was $152 for the first six months, primarily reflecting hedge-related changes and reclassifications; comprehensive income was $195, versus $88 in 2008.
Liquidity, financing, distributions and outlook
- In April, Plains issued $350 million of 8.75% senior notes due 2019 and used the proceeds to reduce credit-facility borrowings. In July, after quarter-end, it issued $500 million of 4.25% senior notes due 2012 to support working-capital and seasonal inventory needs. The $175 million of 4.75% notes due August 15, 2009 was expected to be repaid with cash and credit-facility capacity.
- Plains issued 5.75 million common units in March for approximately $210 million net proceeds. Units outstanding were approximately 128.9 million at June 30; the filing reports 128,938,683 outstanding at August 4.
- The quarterly distribution was $0.905 per unit, declared July 15 and payable August 14, 2009. Plains said it distributes available cash quarterly. The general partner’s incentive distributions were being reduced under agreements related to the Pacific and Rainbow acquisitions.
- Management forecast approximately $370 million of 2009 internal growth project expenditures and reported $157 million spent in the first six months. No earnings or distribution guidance was provided. Management described liquidity as sufficient but warned that prolonged financial-market disruption or adverse energy-price volatility could materially affect results and liquidity.
Risks, contingencies and unusual items
- Environmental liabilities included a $46 million reserve at June 30. Matters included enforcement proceedings concerning earlier pipeline releases; the partnership said penalties were probable for certain releases and disclosed potential injunctive requirements. A separate EPA action concerning a Pacific legacy spill sought a maximum penalty of approximately $3.7 million; the final amount remained uncertain.
- Approximately $62 million of claims involving SemCrude bankruptcy setoffs were being challenged by creditors. Other Pacific legacy environmental matters, including contamination claims, remained disputed or unresolved.
- Management warned that future releases, unreserved environmental costs, reduced insurance coverage, counterparty credit problems, market volatility, project execution, commodity volumes and access to financing could adversely affect performance.
- Commodity, interest-rate and currency derivatives are used for risk management, but mark-to-market effects can create earnings volatility. Plains expected approximately $106 million of net deferred losses in accumulated other comprehensive income to be reclassified into earnings over the next 12 months, subject to market conditions and underlying transactions.
- Adoption of new accounting guidance for partnership earnings-per-unit allocation changed the EPS calculation and required prior-period recasting; it did not change net income or cash flows. Other cited accounting-standard adoptions had no material financial impact.
Most important facts for investors to verify
- Whether marketing-segment gains from contango and derivatives are repeatable, and how much reported earnings depended on mark-to-market timing.
- Availability and terms of credit facilities, refinancing of the August 2009 note maturity, and the impact of the July 2009 debt issuance on leverage and interest expense.
- Working-capital and inventory trends, including whether operating cash flow improves after the first-half inventory build.
- Progress, spending and expected returns on the 2009 growth projects, and whether acquisitions and expansions deliver the reported segment benefits.
- Updates to environmental reserves, spill-related penalties and injunctions, SemCrude disputes, and other unresolved legacy claims.
- Distribution coverage and the effect of incentive-distribution reductions, unit issuance and outstanding incentive awards.