PLAINS GP HOLDINGS LP quarterly report, Q3 FY2023

Business context and reporting period

Plains GP Holdings, L.P. (PAGP) filed this unaudited Form 10-Q for the quarter ended September 30, 2023. PAGP’s cash-generating assets are principally its indirect investment in Plains All American Pipeline, L.P. (PAA); accordingly, consolidated results largely reflect PAA and its subsidiaries. PAA operates crude oil and NGL pipelines, gathering, storage, terminalling and processing assets.

Financial performance and position

Amounts below are in millions of dollars, except per-share data and percentages.

• Q3 operating margin was approximately 1.9%, versus 4.4% a year earlier; nine-month operating margin was approximately 3.0%, versus 3.0%.
• Nine-month operating cash flow was $1,712, down from $2,070. Investing cash use was $444 and financing cash use was $1,406. Cash and restricted cash ended the period at $262, versus $625 at year-end 2022.
• At September 30, total debt was $8,006, including $710 short-term debt; cash was $262. PAGP reported a $275 working-capital deficit but approximately $2,813 of available liquidity, subject to covenant compliance. PAA was in compliance with its covenants.
• Interest expense for the first nine months was $290, compared with $305 in 2022. No variable-rate debt was outstanding at September 30; PAA’s senior notes are fixed-rate.
• Class A distributions were $0.2675 per share quarterly ($1.07 annualized); the November payment was declared at the same rate.

Material changes versus prior comparable periods

• Revenue fell 16% in Q3 and 19% year to date, chiefly as lower commodity prices reduced product sales and related purchases. Services revenue rose 46% in Q3 and 29% year to date, with higher volumes, tariff escalations and acquisition contributions.
• Q3 PAGP-attributable net income declined to $29 from $71, while nine-month attributable income increased to $146 from $124. Nine-month results benefited from asset-sale gains and a more favorable preferred distribution-rate-reset valuation, partly offset by less favorable derivative mark-to-market results.
• Crude Oil Segment Adjusted EBITDA rose 3% in Q3 and 8% year to date, supported by pipeline volumes, tariff escalations and acquisitions. NGL Segment Adjusted EBITDA rose 15% in Q3 but declined 4% year to date; lower volumes, turnarounds, the Keyera divestiture and higher costs weighed on the year-to-date comparison.
• Net gains on asset sales and impairments included an approximately $140 gain on the February 2023 sale of the Keyera Fort Saskatchewan interest. The Rattler Permian transaction added the remaining 43% of OMOG to the Permian JV; a $29 gain arose from remeasuring the previously held interest.
• Crude oil pipeline tariff volumes increased 9% in Q3 and 12% year to date. NGL fractionation volumes declined 12% and 15%, respectively.

Outlook, commentary, risks and unusual items

• Management projected 2023 investment capital of approximately $420 ($325 net to its interest) and maintenance capital of $225 ($210 net), primarily funded by retained cash flow.
• On November 3, 2023, management said it intended to recommend a $0.20 per unit/share annualized distribution increase for PAA common units and PAGP Class A shares for Q4 2023. Any increase remained subject to Board approval and declaration; payment, if approved, was expected in February 2024.
• PAA extended credit-facility maturities in August 2023: the hedged inventory facility to August 2026 and the revolving facility to August 2028 for extending lenders. After quarter-end, PAA redeemed $700 of 3.85% notes due October 2023.
• Line 901 incident costs were estimated at approximately $740 in total. At September 30, the filing reported a $94 gross remaining liability and a $225 long-term insurance receivable considered probable of recovery. Insurers have disputed coverage for part of the 2022 class-action settlement; arbitration is underway. Recovery timing and amount are uncertain, and an unfavorable outcome could materially affect results.
• Other risks include commodity prices and market structure, production and throughput levels, weather, competition, operating interruptions, environmental and legal liabilities, insurance availability, counterparty performance, acquisitions and access to financing. Management cautioned that actual results may differ from forward-looking expectations.
• Controls and procedures were reported effective as of September 30, 2023, with no material third-quarter change in internal control over financial reporting.

Important facts for investors to verify

• Check PAA’s subsequent liquidity, debt balances and covenant status, including the effect of the October $700 note redemption.
• Track operating cash flow and working-capital movements, particularly cash requirements tied to hedging margin balances.
• Verify Board action on the proposed Q4 distribution increase and the cash available to support distributions.
• Monitor insurer arbitration and collection prospects for the $225 Line 901 receivable, along with remaining claims, liabilities and any changes to the estimated $740 total incident cost.
• Assess whether crude oil tariff growth can continue and whether NGL volumes, turnaround activity and operating costs improve.
• Review the assumptions behind non-GAAP Adjusted EBITDA and its reconciliation to GAAP results; the filing notes that these measures may not be comparable with similarly titled measures at other companies.