Plains GP Holdings, L.P. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated results include Plains All American Pipeline, L.P. (PAA) and subsidiaries; substantially all reported operating assets and liabilities are PAA’s. PAGP’s principal cash flows depend on distributions received through its ownership interests in AAP and PAA.
Financial performance
Amounts are in millions, except per-share data. Comparisons are with the corresponding 2016 period.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $6,078 | $4,950 | $12,745 | $9,060 |
| Operating income | $256 | $145 | $844 | $425 |
| Net income | $174 | $82 | $575 | $259 |
| Net income attributable to PAGP | $24 | $42 | $65 | $78 |
| Basic net income per Class A share | $0.16 | $0.41 | $0.47 | $0.80 |
| Adjusted EBITDA | $450 | $474 | $960 | $1,106 |
- Revenue growth primarily reflected higher Supply and Logistics sales volumes and commodity prices. These sales carry corresponding purchase costs, so revenue growth did not translate into higher segment adjusted EBITDA.
- Q2 Transportation and Facilities adjusted EBITDA increased to $298 million and $180 million, respectively, from $274 million and $161 million. Supply and Logistics adjusted EBITDA fell to a loss of $28 million from income of $39 million. For the first half, that segment contributed $23 million versus $224 million.
- Management cited derivative gains, acquisitions and expansion projects as favorable influences on first-half results, offset by less favorable crude oil and NGL market conditions and margin compression. First-half adjusted EBITDA declined 13%, despite GAAP net income more than doubling.
- Interest expense was $127 million in Q2 and $256 million for the first half, up from $118 million and $233 million, respectively. Income tax expense was $24 million and $130 million, versus $10 million and $50 million.
Cash flow, balance sheet and capital
- First-half operating cash flow was $1,459 million, versus $379 million in 2016; investing cash outflow was $1,654 million, versus $522 million. Operating cash flow benefited from lower inventory volumes and lower hedge-margin balances, after those working-capital items had been funded by short-term debt in the prior period.
- Cash was $50 million at June 30, unchanged from year-end 2016. Total debt was $11,154 million, down from $11,839 million; short-term debt was $1,114 million and long-term debt $10,040 million. The company repaid $400 million of senior notes due January 2017.
- Working capital deficit was $228 million. Reported available liquidity was approximately $2.8 billion, including $2,759 million of facility availability after commercial paper borrowings and $50 million cash. PAA was in compliance with credit-agreement covenants.
- Total assets were $27,235 million and total partners’ capital was $12,730 million at June 30. PAGP raised $1,535 million net from Class A share sales, including a 48.3 million-share underwritten offering. Cash distributions to Class A shareholders and noncontrolling interests totaled $771 million in the first half.
- Capital spending was $614 million for expansion and $131 million for maintenance in the first half. Management projected approximately $950 million of 2017 expansion capital. Acquisition capital was $1,325 million, primarily for the $1.217 billion Alpha Crude Connector acquisition.
Material developments, outlook and risks
- Acquisitions and divestitures: The Alpha Crude Connector gathering system was acquired in February, expanding Northern Delaware Basin operations. The company also acquired a propane marine terminal and formed a 50/50 joint venture that acquired Advantage Pipeline. First-half non-core asset sales generated $389 million. A further Rocky Mountain pipeline sale for approximately $250 million was agreed in Q3; other potential divestitures were under discussion.
- Market outlook: Management expected production to increase in the second half of 2017 and potentially support greater Transportation pipeline utilization. It cautioned that timing is uncertain and that excess takeaway capacity, competition, low volatility and narrow price differentials could continue to pressure Supply and Logistics earnings, which management said were difficult to forecast.
- Distributions: PAGP’s quarterly Class A distribution was $0.55 per share, unchanged from the prior three quarters but approximately 11% below the year-earlier level. On August 7, 2017, PAA management announced discussions about resetting PAA’s common-unit distribution to a level supported by cash flow from fee-based Transportation and Facilities; no final decision had been made. Any PAA distribution change could affect PAGP’s available cash and distributions.
- Line 901 incident: The 2015 California crude oil release remains subject to claims, lawsuits and governmental investigations. The company estimated total incident costs at approximately $300 million, with a remaining gross liability of $78 million at June 30 and a recognized insurance receivable of approximately $39 million. The company warned that additional costs, fines or penalties could arise and that Line 901 and most of Line 903 remained out of service with no restart timeline.
- Other exposures: Environmental liabilities totaled $150 million, including Line 901 amounts. The filing also discusses risks from commodity prices, interest rates, Canadian currency movements, counterparty credit, project execution, asset utilization and potential impairment or retirement costs for idled or underutilized assets.
Key facts for investors to verify
- Whether PAA changes its distribution policy and how any reset affects PAGP distributions.
- Supply and Logistics profitability, including ongoing competition, differential compression and derivative-related volatility.
- Final acquisition accounting and expected returns from Alpha Crude Connector, alongside completion and returns of planned expansion projects.
- Progress and proceeds from announced or prospective divestitures and the company’s use of proceeds to support capital needs and leverage.
- Changes in Line 901 liabilities, insurance recoveries, investigations and litigation; and any restart or impairment decisions concerning Lines 901 and 903.
- Liquidity, debt refinancing needs, covenant compliance and the sustainability of operating cash flow given working-capital and commodity-market movements.