Plains GP Holdings, L.P. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 26, 2019. The filing reports consolidated results that substantially reflect Plains All American Pipeline, L.P. (PAA), whose operating assets PAGP indirectly owns through Plains AAP, L.P. PAGP itself has no operating assets; its cash flow depends on distributions passed up from PAA.
Business context and financial performance
PAA operates crude oil and NGL transportation, storage, terminalling, processing and marketing businesses in the United States and Canada. PAGP held an approximate 57% limited partner interest in AAP at year-end; AAP owned approximately 280.5 million PAA common units.
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Revenue | $34.055 billion | $26.223 billion | Up 30%; largely Supply and Logistics revenue, which moves with commodity prices and volumes. |
| Operating income | $2.272 billion | $1.147 billion | Improved, including higher operating results and net gains on asset sales and impairments. |
| Net income (consolidated) | $2.107 billion | Loss of $41 million | 2017 included $823 million deferred tax expense from remeasuring deferred tax assets after federal tax reform. |
| Net income attributable to PAGP | $334 million | Loss of $731 million | Basic EPS was $2.12 versus a loss of $5.03 per share. |
| Adjusted EBITDA (non-GAAP) | $2.680 billion | $2.078 billion | Up 29%; excludes selected items and is not directly comparable to GAAP net income. |
| Cash from operations | $2.604 billion | $2.496 billion | 2018 included about $250 million received for transactions with revenue deferred pending future performance. |
| Investing cash flow | Use of $813 million | Use of $1.570 billion | Included $1.634 billion additions to property and equipment, partly offset by asset-sale proceeds. |
| Total debt | $9.209 billion | $9.920 billion | Long-term debt was $9.143 billion; debt declined alongside the leverage reduction plan. |
| Cash and liquidity | $69 million cash; $2.885 billion available liquidity | — | Liquidity includes committed facilities and is subject to covenant compliance. |
| Class A distributions | $1.20 per share | $1.95 per share | Quarterly distribution was $0.30 throughout 2018. |
Segment Adjusted EBITDA was $1.508 billion for Transportation, $711 million for Facilities and $462 million for Supply and Logistics. Transportation rose 17%, chiefly on stronger Permian volumes and expansions; Facilities declined 3%; Supply and Logistics rose substantially from a weak 2017, benefiting from regional crude differentials, higher lease-gathering and NGL margins, and more favorable derivative effects. Consolidated operating margin was approximately 6.7% (operating income divided by revenue).
Material changes versus the prior comparable period
- Transportation tariff volumes increased 14% to 5.791 million barrels per day, with Permian Basin volumes up 31%.
- Supply and Logistics Adjusted EBITDA increased to $462 million from $60 million; management attributed the improvement mainly to favorable crude grade differentials and stronger NGL results. Results remain sensitive to market structure and can fluctuate sharply.
- PAA sold a 30% interest in BridgeTex for $868 million, recognizing a $200 million gain and retaining a 20% interest. Total asset-sale proceeds were $1.334 billion.
- Interest expense fell to $431 million from $510 million, mainly reflecting lower average debt after prior-year note repayments. PAA made no senior-note repayments in 2018.
- Capital investment totaled $2.140 billion, including $1.888 billion of expansion capital and $252 million of maintenance capital; no acquisitions were completed.
- Distributions to PAGP Class A shareholders fell from $271 million in 2017 to $189 million in 2018, consistent with the lower per-share distribution.
Outlook, management commentary, risks and contingencies
Management described 2018 operating fundamentals as generally favorable, but noted that late-year crude price declines and narrower regional differentials could temper producer investment and growth. PAA expected U.S. production fundamentals, particularly in the Permian, to support fee-based business over time, while warning that new pipeline capacity and competition could pressure volumes, tariffs and margins. The filing does not provide a numerical earnings or distribution forecast.
- 2019 investment: Expansion capital was projected at approximately $1.1 billion, including $630 million for Permian takeaway projects. Management expected limited contribution to 2019 results, with growth benefits mainly in 2020 and beyond.
- Leverage plan: Since June 2017, PAA reported reducing total debt by approximately $2 billion through actions including lower distributions, preferred equity issuance, asset sales, working-capital management and cash-flow growth. Management said it remained on track to meet remaining objectives in the first half of 2019, but gave no assurance. It planned to fund routine growth capital with cash flow in excess of distributions and target lower leverage; distribution increases were a possibility over time, not a commitment.
- Liquidity and credit: PAA reported covenant compliance at year-end. Moody’s rating was below investment grade, while S&P and Fitch ratings were investment grade. A downgrade, restricted market access or reduced supplier credit could raise financing costs and constrain operations or distributions.
- Projects and idled assets: Cactus II was expected to enter partial service in the second half of 2019; Wink to Webster was targeted for 2021. Capline was idled after volumes became insufficient, and a proposed reversal depended on shipper interest. Failure to secure support could lead to retirement costs and impairment; the carrying value of PAA’s interest was $178 million, excluding linefill. California Lines 901 and 903 remained largely out of service; related idled property and equipment carried a value of approximately $120 million.
- Environmental and legal matters: The 2015 Line 901 oil release remained subject to claims, litigation and open investigations. PAA estimated total incident costs of approximately $355 million, with a remaining gross liability of $76 million at year-end and a recorded insurance receivable of about $53 million for probable recoveries. PAA was found guilty on one felony and eight misdemeanor counts in a 2018 California jury trial; post-trial options remained under evaluation. Management did not expect resulting fines or penalties to materially affect financial position or operations, but future costs could exceed estimates.
- Other key risks: Pipeline and facility incidents, environmental regulation and remediation, capacity overbuild, commodity differentials, counterparty credit, interest rates, Canadian-dollar movements, cyber events, weather, project delays, and PAA’s substantial debt could adversely affect cash flow and distributions. Two customers each represented 14% of 2018 revenue, predominantly from Supply and Logistics activity.
Most important facts an investor should verify
- Whether PAA’s cash generation, covenant headroom and credit ratings can sustain PAGP distributions; the filing states PAGP’s cash flow depends on PAA distributions.
- How much of 2018 earnings and cash flow is recurring operating performance versus the BridgeTex gain, other asset sales, derivative effects, and deferred-revenue receipts.
- Progress and economics of the $1.1 billion 2019 capital plan, including project commitments, in-service timing and the expected impact of competing Permian takeaway capacity.
- Whether the leverage reduction objectives were achieved and whether any distribution increase is supported by durable excess cash flow rather than asset sales or borrowing.
- Developments in the Line 901 proceedings, insurance recoveries and remaining liabilities, as well as the restart, impairment or retirement outlook for Lines 901/903 and Capline.