Plains GP Holdings, L.P. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The unaudited consolidated results include Plains All American Pipeline, L.P. (PAA) and subsidiaries; PAGP itself primarily holds interests in the PAA general-partner structure. Unless noted, amounts are in millions of dollars.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $4,950 | $6,663 | $9,060 | $12,605 |
| Operating income | $145 | $210 | $425 | $580 |
| Net income | $82 | $103 | $259 | $365 |
| Net income attributable to PAGP | $42 | $30 | $78 | $61 |
| Basic / diluted net income per Class A share | $0.16 / $0.15 | $0.14 / $0.14 | $0.30 / $0.29 | $0.28 / $0.27 |
| Operating cash flow | Not separately stated for the quarter | $379 | $654 |
- Revenue fell 26% in Q2 and 28% in the first half, primarily reflecting lower commodity prices and lower Supply and Logistics activity. Revenue is not directly comparable to margin because much of the commodity purchase cost passes through.
- Consolidated net income declined 20% in Q2 and 29% for the half year. PAGP-attributable net income rose 40% and 28%, respectively, partly reflecting lower income attributable to noncontrolling interests and lower income tax expense.
- Segment profit was $390 in Q2 versus $371 a year earlier, but $833 for the first half versus $884. Transportation segment profit improved to $252 in Q2 (from $186) and $499 for the half year (from $428); Facilities rose to $156 and $315, respectively. Supply and Logistics fell to a Q2 loss of $18 from profit of $41, and first-half profit of $19 from $171.
- Q2 depreciation and amortization was $205 versus $108; first-half expense was $320 versus $213. The increase included an $80 non-cash impairment of rail and terminal assets and an $18 write-off of assets taken out of service, partly offset by gains on asset sales. Interest expense rose to $118 in Q2 and $233 for the half year.
- First-half operating cash flow was $379, down from $654, including an unfavorable working-capital impact from increased inventory and hedging margin balances. Investing cash use was $522 versus $1,343, while financing provided $146 versus $316. Cash at June 30 was $37.
- Capital expenditures for the first half were $875: $709 expansion, $85 acquisition and $81 maintenance. The filing’s full-year 2016 targets were $1,350–$1,500 of expansion capital and $180–$200 of maintenance capital.
Balance sheet and liquidity
- Total debt was $11.379 billion at June 30, down from $11.931 billion at December 31, 2015. Short-term debt was $1.302 billion; long-term debt was $10.077 billion. Current maturities included $175 million of senior notes due August 2016 and $400 million due January 2017; management expected to refinance these with commercial paper or credit-facility borrowings.
- Current assets were $3.605 billion and current liabilities $4.031 billion, a $426 million working-capital deficit. Management reported approximately $2.993 billion of available liquidity, including cash and available credit capacity, subject to covenant compliance. PAA and AAP were in compliance with their covenants at period end.
- Variable-rate debt was approximately $1.7 billion; its average rate for the first half was 1.6%. Fixed-rate senior notes had approximately $9.8 billion face value.
- PAA raised approximately $1.6 billion net through a January private placement of Series A preferred units. Preferred distributions are cumulative at $2.10 per unit annually; through 2017, PAA may pay them in cash, additional preferred units, or a combination.
- PAGP paid $117 million in distributions to Class A shareholders and $743 million to noncontrolling interests during the first half. Its declared quarterly Class A distribution was $0.231 per share.
Material changes, outlook and risks
- Business conditions: Management cited sustained low oil prices, reduced drilling, production declines in some regions, excess infrastructure and compressed basis differentials. These conditions pressure Supply and Logistics margins and could constrain cash-flow and distribution growth. Management also noted that competition and low market volatility make baseline Supply and Logistics performance challenging.
- Segment developments: Transportation volumes increased 7% for the first half, while tariff revenue was broadly stable; results benefited from the absence of about $65 million of Line 901-related costs recognized in the 2015 second quarter. Facilities benefited from storage capacity expansions and higher fees, but U.S. rail volumes fell 50% for the first half amid weak crude-by-rail demand. Supply and Logistics faced lower lease-gathering margins and unfavorable derivative mark-to-market impacts.
- Significant unusual items: First-half results included $80 million of non-cash rail/terminal impairment, an $18 million asset write-off, and a $25 million gain from fair-value changes in the embedded preferred distribution-rate reset option. The company also recorded $71 million of gains and $55 million of losses related to asset sales, including goodwill impairment.
- Line 901 incident: Line 901 and Line 903 remained shut down, with no restart timeline. PHMSA’s final report attributed the Line 901 rupture directly to external corrosion and identified contributory failures. PAA faced a 46-count California indictment, pleaded not guilty on July 28, 2016, and remained subject to government investigations, lawsuits and potential penalties. Management estimated total Line 901 costs of approximately $269 million and a remaining gross liability of $91 million at June 30; it had recognized a $62 million insurance receivable for costs believed recoverable. Management warned actual costs could materially exceed estimates.
- Other contingencies: Total environmental liabilities were $160 million, with $68 million of related recovery receivables recorded. Other matters included a possible PHMSA penalty related to a separate pipeline release and an EPA notice concerning a California rail facility. Management did not believe pending legal matters would have a material adverse effect overall, but outcomes remain uncertain.
- Simplification transaction: In July 2016, the parties agreed to eliminate PAA’s incentive distribution rights and convert its 2% economic general-partner interest to a non-economic interest. PAA would issue approximately 245.5 million common units to AAP and assume about $593 million of AAP debt. Closing was expected in Q4 2016, subject to customary conditions. PAA had announced an intended reduction in its quarterly common distribution from $0.70 to $0.55; if the simplification had not closed by the relevant Q3 record date, AAP could borrow an estimated $41 million for a distribution true-up.
- Other outlook items: The filing set a 2016 expansion-capital range but did not provide earnings or distribution guidance for the full year. It noted that returns on planned projects and future acquisitions were uncertain. A Western Canada NGL asset acquisition for approximately $204 million was completed in August 2016.
Important facts for investors to verify
- Whether the Simplification Transactions closed as expected, and the final terms, timing and effect on distributions, leverage and ownership.
- Progress toward restarting Lines 901 and 903, and developments in the criminal case, regulatory investigations, lawsuits, insurance recoveries and Line 901 cost estimates.
- Whether PAA maintained liquidity and covenant compliance while refinancing the 2016–2017 note maturities and funding capital spending.
- Whether Supply and Logistics margins, rail utilization and commodity-hedge results improved or remained pressured by market conditions.
- Actual 2016 expansion and maintenance capital spending, project returns, and any additional impairments, asset sales or acquisition costs.