Business context and reporting period
Plains GP Holdings, L.P. (PAGP) filed its annual report for the fiscal year ended December 31, 2017. Although PAGP is a partnership, it is taxed as a corporation and has no operating assets of its own: its cash generation depends on its approximately 55% interest in Plains AAP, which receives distributions from Plains All American Pipeline (PAA). Accordingly, the consolidated financial statements largely reflect PAA’s crude oil, NGL and natural gas midstream operations in Transportation, Facilities, and Supply and Logistics.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $26.223 billion | $20.182 billion |
| Operating income | $1.147 billion | $990 million |
| Net income (loss), consolidated | $(41) million | $660 million |
| Net income (loss) attributable to PAGP | $(731) million | $94 million |
| Adjusted EBITDA (non-GAAP) | $2.078 billion | $2.166 billion |
| Cash provided by operating activities | $2.496 billion | $718 million |
| Cash used in investing activities | $1.570 billion | $1.273 billion |
| Total debt at year-end | $9.920 billion | $11.839 billion |
| Cash and cash equivalents at year-end | $40 million | $50 million |
| Available liquidity at year-end | $2.963 billion | Not stated here |
Revenue growth primarily reflected higher crude oil prices and volumes in Supply and Logistics, as well as acquired and expanded assets. Revenue includes substantial commodity sales and purchases, so it is not a direct measure of fee-based operating performance. Adjusted EBITDA, a non-GAAP measure, declined about 4%. Reported operating margin was not separately stated as a key measure in the filing.
- Segment adjusted EBITDA: Transportation $1.287 billion, up 13%; Facilities $734 million, up 10%; Supply and Logistics $60 million, down 83% from $359 million.
- Distribution: PAGP declared distributions of $1.95 per Class A share in 2017, versus $2.40 in 2016. The quarterly amount was reduced to $0.30 in the second half of 2017 from $0.55 in the first half. PAA reset its annualized common-unit distribution to $1.20 beginning with its third-quarter 2017 distribution.
- Balance sheet and liquidity: Working capital was negative $530 million, but reported available liquidity was approximately $3.0 billion, subject to covenant compliance. PAA was in compliance with its debt covenants at year-end.
- Investment: 2017 acquisition, expansion and maintenance capital totaled $2.705 billion. The company reported 2018 expansion-capital plans of approximately $1.4 billion.
Material changes versus prior comparable period
- Consolidated net loss of $41 million replaced $660 million of net income; PAGP-attributable loss was $731 million versus income of $94 million. A fourth-quarter deferred-tax charge of approximately $823 million from remeasuring the deferred tax asset after the federal corporate tax rate fell from 35% to 21% was the principal driver. Fourth-quarter net loss was $647 million, including an $800 million loss attributable to PAGP.
- Adjusted EBITDA fell $88 million to $2.078 billion. Transportation and Facilities improved, but Supply and Logistics EBITDA dropped $299 million amid margin compression, tighter differentials, competition and reduced arbitrage opportunities.
- Operating cash flow rose to $2.496 billion, aided by reductions in crude-oil inventory and hedging margin balances that had been funded with short-term debt. This working-capital benefit should be distinguished from recurring earnings and cash generation.
- Debt declined by approximately $1.9 billion. PAA repaid or redeemed $1.35 billion of senior notes during 2017, including early redemption of $950 million of notes, and recorded a $40 million loss on those early redemptions.
- PAGP issued 50.1 million Class A shares for net proceeds of approximately $1.535 billion. PAA also issued $788 million net proceeds from Series B preferred units. The proceeds supported capital needs and balance-sheet actions.
Outlook, management commentary, risks and unusual items
- Management described the near-term midstream environment as challenging, citing excess infrastructure capacity, aggressive competition, overcommitted shipper volumes and compressed margins. It characterized the longer-term outlook as favorable, especially for Permian Basin production and fee-based growth.
- PAA’s leverage-reduction plan targets a $1.4 billion reduction in debt from mid-2017 levels through March 31, 2019. Actions included the reduced common-unit distribution, about $700 million in asset sales, a $375 million reduction in hedged-inventory debt by year-end, the Series B preferred issuance and early note repayments. Management said it expected to meet the target date, but cautioned that execution was not assured.
- The 2018 expansion program includes Permian takeaway and related projects; major pipeline projects were expected to contribute minimally in 2018 and primarily support growth from 2019 onward. The Cactus II project was fully committed under long-term third-party contracts and planned for service in the second half of 2019.
- Line 901 incident: The 2015 California crude-oil release remains a significant contingency. The company estimated total costs of approximately $335 million, with a remaining gross liability of $94 million at December 31, 2017. It had collected $174 million of approximately $220 million in costs believed recoverable from insurers and recorded a further $47 million insurance receivable. Government investigations, criminal charges and civil claims remained unresolved; additional costs could exceed estimates.
- Other notable exposures include environmental and pipeline-safety regulation, aging infrastructure, severe weather and operational incidents, cyber risk, customer and counterparty credit, commodity-market conditions, and the ability to obtain permits and complete projects. Insurance has exclusions and deductibles, and certain risks are self-insured.
- PAA’s Moody’s senior-debt rating was downgraded below investment grade in August 2017; the filing noted its remaining investment-grade ratings and the potential effects of further downgrades on borrowing costs, liquidity and supplier credit.
- PAGP’s distributions depend on distributions from AAP and PAA and are not cumulative. PAA’s debt agreements can restrict distributions during a default. PAGP also disclosed material governance and related-party considerations, including the Legacy Owners’ influence and potential conflicts of interest.
Most important facts for investors to verify
- Whether operating cash flow remains strong after the 2017 inventory and margin-collateral releases, and how much is attributable to recurring operations versus working-capital movements.
- Progress toward the $1.4 billion deleveraging target, covenant headroom, credit ratings, available liquidity and the effect of the reduced PAA distribution on PAGP’s cash available to distribute.
- Underlying segment trends—especially Supply and Logistics margins—and whether planned Permian capacity has durable shipper commitments and attractive returns amid competing infrastructure.
- Changes in the Line 901 liability, insurance recoveries, litigation and regulatory outcomes, as well as any impairment or restart decisions for idled Lines 901 and 903 and the Capline system.
- The nature and sustainability of PAGP’s 2017 tax-related loss: the $823 million deferred-tax remeasurement was a material non-cash item, but future taxable income, distributions and tax treatment remain relevant.